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Supplement 


TO  THE 


Standard   Manual 
of  the  Income  Tax 

1919 


COPYRIGHT,  1919, 

STANDARD    STATISTICS    CO.,  Inc. 
47  West  Street,  New  York. 


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The  Information  contained  herein, 
while  not  guaranteed,  is  carefully- 
compiled  and  believed  to  be  correct. 


Foreword 

Following  is  a  digest  of  all  important  new  rulings 
issued  by  the  Bureau  of  Internal  Revenue  since  the 
publication  of  the  Standard  Manual  of  the  Income 
Tax  for  1919,  with  cross  references  to  the  latter 
book.  There  are  included  also  specimens  of  the  more 
important  Forms  of  Return  properly  filled  out  for  the 
guidance  of  the  taxpayer,  also  a  table  of  the  principal 
stock  dividend  payments  during  the  year  1918,  show- 
ing the  proper  allocation  to  various  years  for  tax- 
ation purposes. 

This  Supplement  contains  a  tab  to  be  inserted  in 
the  pocket  on  the  front  cover  of  the  Standard  Manual 
of  the  Income  Tax  for  1919.  This  places  the  infor- 
mation in  both  issues  practically  under  one  cover. 


41024,> 


TABLE  OF  CONTENTS 


Page 
New  Regulations 9 

List  of  Forms  of  Return 45 

Guide  to  Forms  of  Return  47 

Stock    Dividends 51 

Corrections   to   the   Manual 53 

Specimen   Forms   of   Return * 


*  Special  Folder  sent  herewith. 


Index 

Page 


Accounting' — 

Change    in    accounting    period 13 

Methods    of 13 

Period     of '.  12 

Additional  Tax — 

On  sale  of  mineral  deposits 9 

Alien- 
See  "Nonresident  Alien," 

Amortization — 

Additional   requirements   for 17 

Cost  which  may   be   amortized , 16 

Information    in    connection    with 17 

Method     of     16 

Period    ; _ 16 

Property,  cost  of  which  may  be  amortized 16 

Redetermination  of  17 

Assets — 

Valuation  of   upon  reorganization 44 

BanlEs — 

Cash  dividends  paid  by  : 10 

Capital — 

Impairment    of    48 

Citiz^xisliip — 

Who  Is  a  citizen 9 

Compensation — 

Personal    services    13 

Contracts — 

Long   term   -  14 

Contributions — 

Deductible    16 

Corporations — 

See  "Personal  Service  Corporations." 

Affiliated    corporations     41 

Capital: 

Impairment   of   43 

Change   in   ownership   40 

Consolidated   net   income   of  affiliated   corporations 41 

Depletion    and    depreciation: 

Allowance    for    42 

Dividend: 

Effect  of  ordinary  dividend  42 

Effect  of  stock  dividend  43 

Election   to   be   taxed   as   corporation 44 

Extension: 

For  filing  return  calendar  year  1918 12 

For  filing  return  fiscal  year  basis 12 

Computation  of  estimate  of  tax 12 

Fiscal  years  of  affiliated  corporations 41 

Foreign  corporations: 

Returns    of    40 

Invested  Capital: 

Changes   in   during   year 42 

Reorganization : 

Valuation    of    assets    upon 44 

Successor  to  partnership  43 

Undistributed    income    35 

Use    of    prescribed    forms 40 

5 


Corrections  to  Manual — 

Averaging    invested     capital 65 

Husband    and    wife .."".. 53 

Life  insurance  policies ' " '  " 54 

Prices  of  securities — correction  C.  M.  &  St.  P.  stock ........"!...!."]!!  55 

Deductions — 

See  "Depletion." 

Contributions    deductible    16 

Depletion — 

Account    en    books    23 

Capital  recoverable  through: 

In  case  of  timber  28 

Computation  of  allowance  for  timber 28 

Computation  of  allowance  for: 

Gas  wells 21 

Gas  wells  in   future !!.".!.'!.."."...  22 

Oil  and  gas  wejls,  when  quantity  uncertain 22 

Mines  and  oil  wells  20 

Deposits: 

Determination   of  cost  of 19 

Determination  of  fair  market  value  of .  19 

Revaluation   of,  not  allowed   20 

Division  of,  by  owner  and  lessee 19 

Mines,  based  on  advance  royalties 23 

Mines,   oil  and   gas  wells 18 

Capital  recoverable  through: 

In  case  of  owner  18 

In   case   of   lessee   18 

Oil  and  gas  wells — 

Computation    of — for    combined    holdings 22 

Oil  and  gas  wells: 

In   years   prior   to   1916 27 

Ore  in  mines,  determination  of  quantity  of 20 

Oil  in  ground,  determination  of  quantity  of 20 

Statement  of — to  be  attached  to  return — timber 29 

Statement  of,  to  be  attached  to  return: 

Mines    24 

Oil  and  gas  wells 24 

Timber    28 

Dividends — 

Effect  of  ordinary  dividend  42 

Effect  of  stock  dividend   43 

Paid   by   bank   10 

Stock    dividends,    paid    in    1918 51 

Depreciation — 
Mines: 

Improvements  of  27 

Oil  and  gas  wells: 

Improvements    of    27 

In   years   prior   to   1916 27 

Timber: 

Improvements  of  29 

Exemption — 

Personal   and    family    16 

Extension — 

Filing  of  returns  for  the  year  1918... 12 

Taxpayers  in   Hawaii  12 

"Ciduciary — 

Extension   for  filing  returns 12 

Perms — 

List  of  forms 45 

Guide  to  forms 47 

G-ross  Income- 
See  "Income." 

Husband  and  wife- 
Correction  to  Manual 53 


Page 
Income- 
Basis   of   computation    11 

Computation     of     10 

Items    excluded    : 15 

Meaning   of   10 

Undistributed     35 

Insurance — 

Paid    to   estate   or   individual   beneficiaries 15 

Inventories — 

At   cost   '. 38 

At    market    38 

Need     of     38 

Valuation    of    38 

Invested  Capital  (Averagfing") — 

Correction    to    Manual 55 

Idfe  insurance  companies — 

Correction  to  Manual 54 

]Losses — 

Allowance  of  net  loss 39 

Claim   for   allowance    of   39 

Scope    of    net    losses , 39 

Mines— 

Charges  to  capital  and  to  expense 26 

Depreciation    of    improvements 27 

Discovery    of    25 

Mines,  Oil  and  Gas  Wells — 

See  "Depletion." 

Net  Income- 
See  "Income." 

Basis    of    computation    11 

Computation    of   10 

Net  ]&08ses — 

See  "Losses." 

Nonresident  Alien — 

Definition   of   30 

Proof   of    residence   30 

Residence: 

Loss   of  by  alien 30 

Status  of: 

Determined    by   employer   30 

Oil  and  Gas  Wells — 

Charges  to  capital  and  expense 26 

Depreciation    of    improvements 27 

Depreciation  in  years  prior  to  1916 27 

Discovery    of    25 

Proof  of   discovery   20 

Partnerships — 

Corporation    successor    to    partnership 43 

Extension  for  filing  return  fiscal  year  basis 12 

Payments — 

Deferred  on  sale  of  real  estate: 

Installments    ,  14 

Other   than    installments !!!!".."."!!!]""!!!!  14 

Personal  Services — 

See  "Compensation." 


Page 
Personal  Service  Corporations — 

Credits    allowed    stockholders 34 

Definition    of   : 31 

Different  rates  fiscal  year: 

Ending-    in    1918 38 

Ending-    in    1919 34 

Returns  of: 

Calendar  year  1918  31 

Fiscal   year   ending   in    1918 32 

Fiscal  year  ending  in  1919  or  later 38 

Taxation  of  stockholders: 

Calendar    year    1918    32 

•    Fiscal  year  ending  in  1918 32 

Fiscal    year    ending    in    1919 34 

Prices  of  securities  as  of  March  1,  1913 — 

Correction     to     Manual 55 

Property — 

Basis   for  determining   gain   or   loss 36 

Exchange    tor    different    kinds 37 

Exchange   of   stock  37 

Exchanges   of   36 

Gain  or  loss  from  exchange 36 

Real  Estate^ 

See  "Property." 

Sale  of  involving  deferred  payments: 

Installments 14 

Other  than   installments 14 

Returns — 

See   "Personal   Service  Corporations." 

Accounting    period 12 

Change    in    accounting    period 13 

Fiduciaries: 

Extension   of  time  for  filing  returns 12 

Forms  of — 

Guide    to    forms 47 

List    of    forms 45 

Individuals: 

Extension  of  time  for  the  year  1918 12 

Stock  Dividends — 

Principal  list  of  stock  dividends  paid  in  1918 52 

Surtax — 

See  "Additional   Tax." 

Timber  I^ands — 

See  "Depletion"  and  "Depreciation." 

Charges  to  capital  and  to  expense... 29 

Revaluation   of   stumpage 28 

Undistributed   Income 35 

Withholdingr  at  the  Source-^ 

For    the    year    1918 .35 

On    non-resident   aliens    25 

Release  of  excess  tax  -witheld 35 


Individuals 


CITIZENSHIP. 

(New  Definition) 

Who  Is  a  Citizen. — Every  person  born  in  the  United  States  sub- 
ject to  its  jurisdiction,  or  naturalized  in  the  United  States,  is  a  citizen. 
Wlien  any  naturalized  citizen  has  left  the  United  States  and  resided  for 
two  years  in  the  foreign  country  from  which  he  came,  or  for  five  years  in 
any  other  foreign  country,  he  is  presumed  to  have  lost  his  American  citizen- 
ship; but  this  presumption  does  not  apply  to  residence  abroad  while  the 
United  States  is  at  war.  An  Italian,  who  has  come  to  the  United  States 
and  filed  his  declaration  of  intention  of  becoming  a  citizen,  but  who  has  not 
yet  received  his  final  citizenship  papers,  is  an  alien.  A  Swede,  who,  after 
having  come  to  the  United  States  and  become  naturalized  here,  returned  to 
Sweden  and  resided  there  for  two  years  prior  to  April  6,  1917,  is  presumed 
to  be  once  more  an  alien.  On  the  other  hand,  an  individual  born  in  the 
United  States  of  citizen  or  resident  alien  parents,  who  has  long  since  moved 
to  a  foreign  country  and  established  a  domicile  there,  but  who  has  nevei 
been  naturalized  therein  or  taken  an  oath  of  allegiance  thereto,  is  still  a 
citizen  of  the  United  States.  The  difference  between  resident  alien  in- 
dividuals and  nonresident  alien  individuals,  according  to  articles  311-314, 
is  that  a  resident  alien  is  one  who  is  not  a  mere  transient  and  a  non- 
resident alien  is  one  whose  residence  is  not  within  the  United  States 
and  is  not  a  citizen  of  the  United  States. 

Art.  4,  Reg.  45. 


SURTAX. 

(New  Matter) 

Surtax  on  the  sale  of  Mineral  Deposits. — Where  the  taxpayer  by 
prospecting  and  locating  claims,  or  by  exploring  and  discovering  unde- 
veloped claims,  has  demonstrated  the  principal  value  of  mines,  oil  or  gas 
wells,  which  prior  to  his  efforts  had  a  merely  nominal  value,  the  portion  of 
the  surtax  attributable  to  a  sale  of  sucli  property  or  of  the  taxpayer's  in- 
terest therein  shall  not  exceed  20  per  cent  of  the  selling  price.  Exploration 
work  alone  without  discovery  is  not  sufficient  to  bring  a  case  within  this 
provision.  Shares  of  stock  in  a  corporation  owning  mines,  oil  or  gas  wells 
do  not  constitute  an  interest  in  such  property.  To  determine  the  applica- 
tion of  this  provision  to  a  particular  case,  the  taxpayer  should  first  com- 
pute the  surtax  in  the  ordinary  way  upon  his  net  income,  including  his  net 
income  from  any  such  sale.  The  proportion  of  the  surtax  indicated  by  the 
ratio  which  the  taxpayer's  profit  from  the  sale  of  tlie  property  bears  to 
the  sum  of  his  total  income  plus  the  general  deductions  not  chargeable 
against  any  particular  item  of  gross  income  is  the  portion  of  the  surtax 
attributable  to  such  sale,  and  if  it  exceeds  20  per  cent  of  the  selling  price 
of  the  property  such  portion  of  the  surtax  shall  be  reduced  to  that  amount. 

Art.  13,  Reg.  45. 
9 


« 


INCOME. 

Net  Income. 
(This  Amplifies  H 12  Manual,  page  183) 
Meaning  of  Net  Income. — The  tax  imposed  by  the  statute  is  upon 
income.  In  the  computation  of  the  tax  various  classes  of  income 
must  be  considered:  (a)  Income  (in  the  broad  sense),  meaning  all  wealth 
which  flows  in  to  the  taxpayer  other  than  as  a  mere  return  of  capital. 
It  includes  the  forms  of  income  specifically  described  as  "gains  and  profits," 
including  gains  derived  from  the  sale  or  other  disposition  of  capital  assets. 
It  is  not  limited  to  cash  alone,  for  the  statute  recognizes  as  income- 
determining  factors  other  items,  among  which  are  inventories,  accounts 
receivable,  property  exhaustion  and  accounts  payable  for  expenses  in- 
curred. See  sections  202  (a)  (Basis  for  Determining  Gain  or  Loss)  and 
213  (a)  which  defines  (Gross  Income)  Manual  P.  54,  L.  73,  Law;  P.  60, 
L.  10,  Law.  Gross  income,  meaning  income  (in  the  broad  sense)  less 
Income  which  is  by  statutory  provision  or  otherwise  exempt  from  the 
tax  imposed  by  the  statute.  See  Manual  P.  184,  If  15  defining  gross  in- 
come, also  Manual,  Law  P.  60,  L.  10.  Net  income,  meaning  gross  income 
less  statutory  deductions.  The  statutory  deductions  are  in  general, 
though  not  exclusively,  expenditures,  other  than  capital  expenditures, 
connected  with  the  production  of  income.  See  sections  214  (Deductions 
Allowed)  and  215  (Items  Not  Deductible).  Manual,  Law  P.  62,  L.  8; 
Law  P.  65,  L.  13.  Net  income  less  credits.  See  credits  allowed,  Manual 
P.  216,  If  104;  also  Manual  Law  P.  65,  L.  30.  The  surtax  is 
imposed  upon  net  income;  the  normal  tax  upon  net  income  less  credits. 
Though  taxable  net  income  is  wholly  a  statutory  conception  it  follows, 
subject  to  certain  modifications  as  to  exemptions  and  as  to  some  of  the 
deductions,  the  lines  of  commercial  usage.  Statutory  "net  income"  is, 
subject  to  these  modifications,  commercial  "net  income."  This  appears 
from  the  fact  that  ordinarily  it  is  to  be  computed  in  accordance  with 
the  method  of  accounting  regularly  employed  in  keeping  the  books  of 
the  taxpayer.  For  instances  in  which  net  income  is  not  to  be  computed 
in  accordance  with  the  taxpayer's  method  of  accounting  see  articles  22 
and  23,  which  defines  the  computation  of  net  income.  As  to  net  income 
of  corporations  see  sections  232  (Net  Income  Defined)  ;  236  (Credits  Al- 
lowed), of  the  statute,  Manual,  Law  P.  75,  L.  27;  P.  79,  L.  29. 

Art.  21,  Reg.  45. 

Cash  Dividends  Paid  by  Bank. — If  a  bank  declares  a  cash  dividend  In 
pursuance  of  a  plan  by  which  all  or  a  part  of  the  stockholders  are  to 
pay  back  to  the  bank  the  amount  so  paid  for  new  stock,  these  dividends 
are  cash  dividends. 

Cash  dividends  received  in  1918  are  taxable  at  the  1918  rates  in  ac- 
cordance with  a  statement  made  by  the  Commissioner  of  Internal  Rev- 
enue. No  doubt  this  statement  has  been  made  on  account  of  miscon- 
struction placed  upon  Section  201  (e).  See  "Standard  Manual  of  In- 
come Tax  for  1919,"  P.  53,  L.  54. 

(The  remainder  of  the  ruling  is  a  repetition  of  previous  rulings]. — 

(This  Amplifies  Old  Deflnitloxi — See  Mannal,  pagfe  256) 
Computation  of  Net  Income. — Net  income  must  be  computed  with 
respect  to  a  fixed  period.  Ordinarily  that  period  is  twelve  months 
and  is  known  as  the  "taxable  year."  Items  of  income  and  of  expendi- 
tures which  as  gross  income  and  deductions  are  elements  in  the  compu- 
tation of  net  income  need  not  be  in  the  form  of  cash.  It  is  sufficient 
that  such  items,  if  otherwise  properly  included  in  the  computation,  can 
be  valued  in  terms  of  money.     The  time  as  of  which  any  item  of  gross 

10 


income  or  any  deduction  is  to  be  accounted  for  must  be  determined  in  the 
light  of  the  fundamental  rule  that  the  computation  shall  be  made  in 
such  a  manner  as  clearly  reflects  the  taxpayer's  income.  If  the  method 
of  accounting  regularly  employed  by  him  in  keeping  his  books  clearly 
reflects  his  income,  it  is  to  be  followed  with  respect  to  the  time  as  of 
which  items  of  gross  income  and  deductions  are  to  be  accounted  for.  If 
the  taxpayer  does  not  regularly  employ  a  method  of  accounting  which 
clearly  reflects  his  income,  the  computation  shall  be  made  in  such  manner 
as  in  the  opinion  of  the  Commissioner  clearly  reflects  it. 

Art.  22,  Reg.  45. 

(These  Regulations  With  Respect  to  Accotuiting'  Methods  in  Arts.  23,  24 
and  25;  Art.  23  and  24  Are  a  Distinct  Improvement  Over 
Former  Regulations) 
Bases  of  Computation. — Approved  standard  methods  of  account- 
ing will  ordinarily  be  regarded  as  clearly  reflecting  income.  A  method 
of  accounting  will  not,  however,  be  regarded  as  clearly  reflecting  income 
unless  all  items  of  gross  income  and  all  deductions  are  treated  with 
reasonable  consistency.  See  section  200  (Manual,  Law  P.  52,  L.  27)  of 
the  statute  for  definitions  of  "paid,"  "paid  or  accrued,"  and  "paid  or 
incurred."  All  items  of  gross  income  shall  be  included  in  the  gross  in- 
come for  the  taxable  year  in  which  they  are  received  by  the  taxpayer, 
and  deductions  taken  accordingly,  unless  in  order  clearly  to  reflect 
income  such  amounts  are  to  be  properly  accounted  for  as  of  a  different 
period.  See  section  213  (Gross  Income,  Manual,  Law  P.  60,  L.  10)  of 
the  statute.  A  taxpayer  is  deemed  to  have  received  items  of  gross 
income  which  have  been  credited  or  made  available  to  him  without  re- 
striction. On  the  other  hand,  appreciation  in  value  of  property  is  not 
even  an  accrual  of  income  to  a  taxpayer  prior  to  the  realization  of  such 
appreciation  through  conversion  of  the  property. 

Art.  23,  Reg.  45. 

ACCOUNTING. 

Methods  of  Accounting. — It  is  recognized  that  no  uniform  method 
of  accounting  can  be  prescribed  for  all  taxpayers,  and  the  law 
contemplates  that  each  taxpayer  shall  adopt  such  forms  and  systems  of 
accounting  as  are  in  his  judgment  best  suited  to  his  purpose.  Each 
taxpayer  is  required  by  law  to  make  a  return  of  his  true  income.  He 
must,  therefore,  maintain  such  accounting  records  as  will  enable  him  to 
do  so.  See  section  1305  (Manual,  Law  P.  161,  L.  54)  of  the  statute  and 
article  1711  (Aids  to  Collection  of  Tax).  Among  the  essentials  are  the 
following : 

(1)  In  all  cases  in  which  the  production,  purchase  or  sale  of  merchandise 
of  any  kind  is  an  income-producing  factor  inventories  of  the  merchandise 
on  hand    (including  finished  goods,  work  in  process,   raw  materials  and 
supplies)    should  be  taken   at   the   beginning  and   end  of  the  year  and  , 
used  in  computing  the  net  income  of  the  year; 

(2)  Expenditures  made  during  the  year  should  be  properly  classified 
as  between  capital  and  income,  that  is  to  say,  that  expenditures  for 
items  of  plant,  equipment,  etc.,  which  have  a  useful  life  extending  sub- 
stantially beyond  the  year  should  be  charged  to  a  capital  account  and 
not  to  an  expense  account;    and 

(3)  In  any  case  in  which  the  cost  of  capital  assets  is  being  recovered 
through  deductions  for  wear  and  tear,  depletion  or  obsolescence  any 
expenditure  (other  than  ordinary  repairs)  made  to  restore  the  property 
or  prolong  its  useful  life  should  be  charged  against  the  property  account 
or  the  appropriate  reserve  and  not  against  current  expenses. 

Art.  24,  Reg.  45. 
11 


RETURNS. 
ANNUAL. 

Extension  of  Time  to  File. 

Corporations  and  Individuals. — By  the  filing  of  returns  on  or  before 
March  15,  1919,  an  estimate  of  the  amount  of  taxes  due  (Form  1031-T 
for  corporations  and  Form  1040-T  for  individuals)  accompanied  by  pay- 
ment of  one-fourth  of  estimated  amount  of  tax  due,  the  time  for  filing 
such  returns  will  be  extended  for  45  days  from  March  15. 

Pending  the  issuance  of  the  new  form  of  annual  return  (form  1120), 
corporations  must  ^le  the  tentative  return  (on  form  1131-T),  and  pay 
at  least  a  quarter  of  the  tax  by  March  15. 

Corporation— Method  of  Computing  Estimate  of  Tax. — Page  446, 
If  815,  "Standard  Manual  of  the  Income  Tax  for  1919,"  shows 
the  method  of  computing  the  estimate  of  the  amount  of  tax  to  be  re- 
ported on  Form  1031-T. 

Fiduciaries. — Time  for  filing  returns  on  Form  1041  is  extended  to  May 
15,  1919. 

Partnerships  and  Corporations  With  Fiscal  Year  Ending  in  1918.— 

Partnerships  and  corporations  having  a  fiscal  year  ending  in  1918,  which 
have  secured  an  extension  of  time  to  file  returns  are  granted  an  exten- 
sion to  March  15,  1919,  for  filing  such  returns.  (See  T.  D.  2796.) 

Taxpayers  in  Hawaii. — Sixty  days'  extension  of  time  from  March  15, 
1919,  for  filing  such  returns. 

ACCOUNTING  PERIOD. 

Accounting  Period. — The  return  of  a  taxpayer  is  made  and  his 
income  computed  for  his  "taxable  year,"  which  means  his  fiscal  year, 
or  the  calendar  year  if  he  has  not  established  a  fiscal  y^ar.  The  term 
"fiscal  year"  means  an  accounting  period  of  12  months  ending  on  the 
list  day  of  any  month  other  than  December.  No  fiscal  year  will,  how- 
ever, be  recognized  unless  before  its  close  it  was  definitely  established 
as  an  accounting  period  by  the  taxpayer  and  the  books  of  such  taxpayer 
were  kept  in  accordance  therewith.  The  taxable  year  1918  is  the  calendar 
year  1918,  or  any  fiscal  year  ending  during  the  calendar  year  1918.  See 
section  200  (Definitions — Manual,  Law  P.  52,  L.  27)  of  the  statute  and 
article  1533  (Taxable  Year,  Withholding  Agent  and  Paid).  A  taxpayer 
shall  make  his  return  for  the  taxable  year  1918  on  the  basis  of  his  an- 
nual accounting  period  (fiscal  or  calendar  year),  even  though  a  part  of 
such  accounting  period  was  included  in  a  period  for  which  he  had  pre- 
viously made  return.  Thus  an  individual  whose  accounting  period 
ended  June  30,  1918,  and  who  had  previously  made  a  return  for  the 
calendar  year  1917,  should  make  a  complete  return  in  accordance  with 
the  provisions  of  the  statute  for  the  twelve  months  ending  June  30, 
1918.  For  adjustments  to  be  made  with  respect  to  iweome  included  in 
both  returns  see  section  205  (Fiscal  Year  with  Different  Rates — Manual, 
Law  P.  55,  L.  44)  of  the  statute  and  articles  1622  and  1624,  which  de- 
fines fiscal  year  of  corporation  ending  in  1918,  and  the  fiscal  year  of 
an  individual  ending  in  1918.  A  taxpayer  making  his  first  return 
for  income  tax  shall  make  such  return  on  the  basis  of  his  annual  ac- 
counting period.  See  section  226  (Returns  When  Accounting  Period 
Changed — Manual,  Law  P.  72,  L.  43)  of  the  statute  and  article 
431.     Except  in  the  cases  of  a  return  for  the  taxable  year  1918  and  of 

12 


a  first  return  for  income  tax  a  taxpayer  shall  make  his  return  on  the 
basis  of  the  new  accounting  period  in  accordance  with  the  requirements 
taxable  year  immediately  preceding  unless,  with  the  approval  of  the 
Commissioner,  he  has  changed  the  basis  of  computing  his  net  income. 

Art.  25,  Reg.  45. 

(See  Manual,  pag-e  256) 
Change  in  Accounting  Period. — If  a  taxpayer  changes  his  account- 
ing period,  he  shall  as  soon  as  possible  give  written  notice  to  the 
collector  for  transmission  to  the  Commissioner  of  such  change  and  his 
reasons  therefor.  The  Commissioner  will  not  approve  a  change  of  the 
basis  of  computing  net  income  unless  such  notice  is  given  (a)  at  least  30 
days  before  the  due  date  of  the  taxpayer's  return  on  the  basis  of  his 
existing  taxable  year  and  (b)  at  least  30  days  before  the  due  date  of 
his  return  on  the  basis  of  the  proposed  taxable  year.  If  the  change  in 
the  basis  of  computing  the  net  income  of  the  taxpayer  is  approved  by  the 
Commissioner,  the  taxpayer  shall  thereafter  make  his  returns  upon  the 
basis  (fiscal  or  calendar  year)  upon  which  he  made  his  return  for  the 
of  section  226  (Returns  When  Accounting  Period  Changed — Manual, 
Law  P.  72,  L.  43)  of  the  statute  and  his  net  income  shall  be  computed 
as  therein  provided.  See  article  431  (Returns  When  Accounting  Period 
Changed). 

Art.  26,  Reg.  45. 

COMPENSATION. 

(See  "Standard  Manual,"  pagfe  207,  1179) 
Compensation  for  Personal  Services. — Where  no  determination  of 
compensation  is  had  until  the  completion  of  the  services,  the  amount 
received  is  ordinarily  income  for  the  calendar  year  of  its  determination 
or  receipt.  Where  services  are  paid  for  with  something  other  than  money, 
the  fair  market  value  of  the  thing  taken  in  payment  is  the  amount  to 
be  included  as  income.  If  the  services  were  rendered  at  a  stipulated 
price,  in  the  absence  of  evidence  to  the  contrary  such  price  will  be  pre- 
sumed to  be  the  fair  value  of  the  compensation  received.  Commissions 
paid  salesmen,  compensation  for  services  on  the  basis  of  a  percentage  of 
profits,  commissions  on  insurance  premiums,  retired  pay  of  federal  and 
other  officers,  and  pensions  or  retiring  allowances  paid  by  the  United 
States  or  private  persons,  are  income  to  the  recipients;  as  are  also 
marriage  fees,  baptismal  offerings,  and  so-called  gifts  and  contributions 
received  by  a  clergyman,  evangelist  or  religious  worker  for  services 
,  rendered.  Premiums  paid  by  an  employer  on  accident  or  health  policies 
in  favor  of  his  employees  as  additional  compensation  of  such  employees 
are  income  to  the  employees.  Compensation  paid  an  employee  of  a  cor- 
poration in  its  stock  is  to  be  treated  as  if  the  corporation  sold  the  stock 
for  its  market  value  and  paid  the  employee  in  cash.  See  further  articles 
105-108,  which  deals  with  the  subject  more  in  full. 


Art.  32,  Reg.  45. 


CONTRACTS. 


(New  Matter.) 
Long  Term  Contracts. — Persons  engaged  in  contracting  operations, 
who  have  uncompleted  contracts,  in  some  cases  perhaps  running 
for  periods  of  several  years,  will  be  allowed  to  prepare  their  returns  so 
that  the  gross  income  will  be  arrived  at  on  the  basis  of  completed  work; 
that  is,  on  jobs  which  have  been  finally  completed  any  and  all  moneys 
received  in  payment  will  be  returned  as  income  for  the  year  in  which  the 
work  was  completed.    If  the  gross  income  is  arrived  at  by  this  method,  the 

13 


deduction  from  gross  income  should  be  limited  to  the  expenditures  made 
on  account  of  such  completed  contracts.  Or  the  percentage  of  profit  from 
the  contract  may  be  estimated  on  the  basis  of  percentage  of  completion, 
in  which  case  the  income  to  be  returned  each  year  during  the  performance 
of  the  contract  will  be  computed  upon  the  basis  of  the  expenses  incurred 
on  such  contract  during  the  year;  that  is  to  say,  if  one-half  of  the  esti- 
mated expenses  necessary  to  the  full  performance  of  the  contract  are  in- 
curred during  one  year,  one-half  of  the  gross  contract  price  should  be  re- 
turned as  income  for  that  year.  Upon  the  completion  of  a  contract  if  it  is 
found  that  as  a  result  of  such  estimate  or  apportionment  the  income  of  any 
year  or  years  has  been  overstated  or  understated,  the  taxpayer  should 
file  amended  returns  for  such  year  or  years. 

Art.  33,  Reg.  45. 

REAL  ESTATE. 

Deferred  Payments. 
(See  Manual,  p.  198,  1145.) 
Sale  of  Real  Estate  Involving  Deferred  Payments. — Deferred  pay- 
ments sales  of  real  estate  ordinarily  fall  into  two  classes  when  con- 
sidered with  respect  to  the  terms  of  sale,  as  follows: 

(1)  Installment  transactions,  in  which  the  initial  payment  is  relatively 
small  (generally  less  than  one-fourth  of  the  purchase  price)  and  the  de- 
ferred payments  usually  numerous  and  of  small  amount.  .They  include 
(a)  sales  where  there  is  immediate  transfer  of  title  when  a  small  initial 
payment  is  made,  the  seller  being  protected  by  a  mortgage  or  other  lien 
as  to  deferred  payments,  and  (b)  agreements  of  purchase  and  sale  which 
contemplate  that  a  conveyance  is  not  to  be  made  at  the  outset,  but  only 
after  all  or  a  substantial  portion  of  the  agreed  installments  have  been 
paid. 

(2)  Deferred  payment  sales  not  on  the  installment  plan,  in  which 
there  is  a  substantial  initial  payment  (ordinarily  not  less  than  one- 
fourth  of  the  purchase  price),  deferred  payments  being  secured  by  a 
mortgage  or  other  lien.  Such  sales  are  distinguished  from  sales  on  the 
installment  plan  by  the  substantial  character  of  the  initial  payment  and 
also  usually  by  a  relatively  small  number  of  deferred  payments. 

In  determining  how  these  classes  shall  be  treated  in  levying  the 
income  tax,  the  question  in  each  case  is  whether  the  income  to  be 
reported  for  taxation  shall  be  based  only  on  amounts  actually  received 
in  a  taxing  year,  or  on  the  entire  consideration  made  up  in  part  of  agi'ee- 
ments  to  pay  in  the  future. 

Art.  41,  Reg.  45. 
(See  Manual,  p.   198,  1T45.) 

Deferred  Payment  Sales  of  Real  Estate  Not  on  the  Installment 
Plan. — In  class  (2)  in  the  nevt  to  the  last  article  the  obligations  as- 
sumed by  the  buyer  are  much  better  secured  because  of  the  margin 
afforded  by  the  substantial  first  payment,  and  experience  shows  that 
the  greater  number  of  such  sales  are  eventually  carried  out  accord- 
ing to  their  terms.  These  obligations  for  deferred  payments  are 
therefore  to  be  regarded  as  equivalent  to  cash,  and  the  profit  indi- 
cated by  the  entire  consideration  is  taxable  income  for  the  year  in 
which  the  initial  payment  was  made  and  the  obligations  assumed. 
If  the  buyer  defaults  and  the  seller  regains  title  to  the  land  by  agree- 
ment or  process  of  law,  retaining  payments  previously  made,  he  may 
deduct   from    his   gross   income    as   a    loss    such    proportion   of   the    de- 

14 


faulted  payments  as  was  previously  returned  as  income,  provided 
that  so  much  of  the  selling  price  previously  received  as  has  not  been 
reported  as  income  is  accounted  for  in  the  inventory  of  the  property 
by  deduction  from  the  original  cost. 

Art.  43,  Reg.  45. 

(This  ruling:  clears  up  the  ciuestion  of  the  non-taxability  of  officers  and 

employees  of  a  State  or  political  subdivision,  oooasioned  by 

the    omission    of    this    specific    exemption    from 

the  new  Act.) 

What  Excluded  From  Gross  Income. — Gross  income  excludes  the 
items  of  income  specifically  exempted  by  the  statute  and  also  certain 
other  kinds  of  income  by  statute  or  fundamental  law  free  from  tax. 
Compensation  paid  its  officers  and  employees  by  a  State  or  political 
subdivision  thereof,  fees  received  by  notaries  public  commissioned  by 
States,  and  the  income  of  State  workmen's  compensation  insurance  funds 
established  by  State  statutes,  are  not  taxable.  Employees  of  universities 
receiving  salaries  paid  in  part  or  in  whole  from  funds  available  under 
the  Smith-Lever  Act  of  May  8,  1914,  who  are  officers  or  employees  of  a 
State,  are  not  required  to  return  as  taxable  incomes  the  salaries  so 
received.  Since  June  25,  1918,  no  assessment  of  any  federal  tax  may 
be  made  on  any  allotments,  family  allowances,  compensation,  or  death  or 
disability  insurance  payable  under  the  War  Risk  Insurance  Act  of 
September  2,  1914,  as  amended,  even  though  the  benefit  accrued  before 
that  date.  Any  return  filed  as  the  basis  of  an  assessment  to  be  made 
after  June  25,  1918,  should  not  include  such  benefits  as  part  of  taxable 
income. 

Art.  71,  Reg.  45. 

INSURANCE 

(The  followtugr  parag'raph  corrects  ^392  of  the  Standard 
Manual  of  Income  Tax.) 

Proceeds  of  Insurance. —  (a)  Upon  the  death  of  an  insured  the  pro- 
ceeds of  his  life  insurance  policies,  whether  paid  to  his  estate  or  to  in- 
dividual beneficiaries  (but  not  if  paid  to  a  corporation  or  partnership) 
are  excluded  from  the  gross  income  of  the  beneficiary,  (b)  During  his 
life  only  so  much  of  the  amount  received  by  an  insured  under  life,  en- 
dowment, or  annuity  contracts  as  represents  a  return,  without  interest, 
of  premiums  paid  by  him  therefore  is  excluded  from  his  gross  income, 
(c)  Whether  he  be  alive  or  dead,  the  amounts  received  by  an  insured 
or  his  estate  or  other  beneficiaries  through  accident  or  health  insurance 
or  under  workmen's  compensation  acts  as  compensation  for  personal  in- 
juries or  sickness  are  excluded  from  the  gross  income  of  the  insured, 
his  estate  and  other  beneficiaries.  Any  damages  recovered  by  suit  or 
agreement  on  account  of  such  injuries  or  sickness  are  similarly  ex- 
cluded from  the  gross  income  of  the  individual  injured  or  sick,  if  living, 
or  his  estate  or  other  beneficiaries  entitled  to  receive  such  damages,  if 
dead. 

Art.  72,  Reg.  45. 

EXEMPTIONS  AND  CREDITS. 

Personal  and  Family  Exemptions — ^New  Ruling  Revoked. — By  a  ruling 
issued  March  11,  1919,  the  instructions  as  to  sub-dividing  of  personal 
and  family  exemption  (provided  for  in  paragraph  3,  section  6  of  in- 
structions on  the  new  forms  for  individual  returns)  are  made  void. 
Under  this  ruling  a  person  if  married  and  living  with  wife   (or  hus- 

15 


band)  on  the  last  day  of  the  year  is  allowed  an  exemption  of  $2,000. 
A  taxpayer  who,  though  unmarried,  supported  in  his  household  on  Dec. 
31,  one  or  more  relatives  who  were  dependent  upon  him,  may  claim  th<» 
$2,000  exemption.  Single  persons,  also  married  persons  who  were  liv- 
ing apart  on  Dec.  31,  and  who  have  no  dependents,  may  claim  the  $2,000 
exemption.  Additional  exemption  of  $200  is  allowed  for  each  person 
who  was  dependent  on  the  taxpayer  on  Dec.  31,  if  the  dependent  is  un- 
der 18  years  of  age  or  is  mentally  or  physically  incapable  of  self-sup- 
port. 


w 


DEDUCTIONS. 


Expenses. 

(Standard  Manual  of  Income  Tax,  pagre  247,  If  212.) 
Contributions  Deductible.— Gifts  by  individuals  to  War  Chest,  War 
Community,   church   and   missionary   funds   are   allowable   deductions. 

AMORTIZATION. 

(An  admirable  exposition  of  the  princinles  of  the  Act  relatinsr  to.) 
Property  the  Cost  of  Which  May  Be  Amortized. — The  taxpayer 
may  make  a  reasonable  deduction  from  gross  income  not  in  excess 
of  a  sura  sufficient  to  extinguish  the  cost  of  buildings,  machinery,  equip- 
ment, or  other  facilities  constructed,  erected,  installed,  or  acquired  on  or 
after  April  6,  1917,  for  the  production  of  articles  contributing  to  the 
prosecution  of  the  present  war,  and  of  vessels  constructed  or  acquired  on 
or  after  such  date  for  the  transportation  of  articles  or  men  contributing 
to  the  prosecution  of  the  present  war.  A  deduction  on  account  of  amor- 
tization will  be  allowed  only  in  the  case  of  enterprises  or  projects  falling 
within  the  class  of  activities  contributing  to  the  prosecuton  of  the  present 
war.  See  also  articles  1601-1603,  which  give  the  scope  of  net  losses 
and  ailowance  of  net  loss. 

Art.  181,  Reg.  45. 

Cost  Which  May  Be  Amortized. — The  total  amount  to  be  extin- 
guished by  amortization  is  the  difference  between  the  original  cost 
to  the  taxpayer  of  the  property  and  its  value  to  the  taxpayer  at  the  close 
of  the  amortization  period  (a)  for  sale  or  (b)  for  use,  immediate  or  pros- 
pective, as  part  of  the  plant  or  equipment  of  a  going  business,  whichever 
value  is  the  larger,  less  any  amounts  otherwise  deducted  or  deductible 
for  wear,  tear,  obsolescence,  and  loss.  In  the  case  of  property  the  con- 
struction or  installation  of  which  was  commenced  before  April  6,  1917, 
and  completed  subsequently  to  that  date,  amortization  will  be  allowed 
with  respect  only  to  the  cost  inciwred  on  or  after  April  6,  1917. 

Art.  182,  Reg.  45. 

Amortization  Period. — The  period  over  which  the  deduction  allowed 
is  to  be  spread,  or  during  which  it  is  to  be  amortized,  is  the  esti- 
mated period  between  the  date  of  acquisition  or  completion  of  the  property 
and  the  date  upon  which  either  (a)  the  property  will  become  useless  or 
(b)  the  taxpayer  will  be  al)le  to  earn  by  operation  or  use  a  normal  return 
upon  the  unamortized  cost,  whichever  date  is  the  earlier. 

Art.  183,  Reg.  45. 

Method  of  Amortization. — The  proportion  of  allowable  deduction 
to  be  allocated  to  each  taxable  year  of  the  amortization  period  will 
be,  as  nearly  as  may  be  determined,  the  same  proportion  which  tt'* 
net  income  or  profit  derived  during  such  taxable  year  bears  to  the  entir« 
net  income  or  profit  derived  during  the  amortization  period  from  the 
operation  or  use  of  such  property. 

Art.  184,  Reg.  45. 

16 


Additional  Requirements  for  Amortization. — Claims  for  amortization 
must  be  unmistakably  differentiated  in  the  return  from  all  other 
claims  for  wear,  tear,  obsolescence,  and  loss.  No  such  claim  will 
be  allowed  unless  it  is  reflected  in  any  accounts  submitted  by  the  taxpayer 
to  stockholders  and  in  any  credit  statements  by  the  taxpayer  to  banks, 
and  is  given  full  effect  on  his  financial  books  of  account.  If  Government 
or  other  contracts  taken  by  the  taxpayer  contained  recognition  of  amor- 
tization as  an  element  in  the  cost  of  production,  copies  of  such  contracts 
shall  be  filed  with  the  taxpayer's  return,  together  with  a  statement  and 
description  of  any  sums  received  on  account  of  amortization  and  the  basis 
upon  which  they  were  determined.  In  any  case  in  which  an  allowance 
has  been  made  for  amortization  of  cost  the  taxpayer  will  not  be  allowed 
to  restore  to  his  invested  capital  for  the  purpose  of  the  war  profits  and 
excess  profits  tax  anv  portion  of  the  amount  covered  by  such  allowance. 

Art.  185,  Reg.  45. 

Redetermination  of  Amortization  Allowance. — Redetermination  of 
the  deduction  allowed  on  account  of  amortization  may,  or  at  the 
request  of  the  taxpayer  shall,  be  made  by  the  Commissioner  at  any  time 
within  three  years  after  the  termination  of  the  present  war,  and  if  as  a 
result  of  an  appraisal  or  from  other  evidence  it  is  found  that  the  deduction 
originally  allowed  was  incorrect,  the  amount  of  tax  due  for  each  taxable 
year  during  the  amortization  period  will  be  adjusted  by  additional  assess 
ment  or  by  refund. 

Art.  186,  Reg.  45. 

Information  to  Be  Furaished  by  Taxpayer. — To  obtain  the  benefit 
of  this  provision  of  the  statute  the  taxpayer  must  establish  to  the 
satisfaction  of  the  Commissioner  that  the  entire  deduction  claimed 
and  the  proportion  claimed  for  any  particular  year  are  reasonable.  The 
taxpayer  shall  also  submit  a  supplementary  statement  setting  forth  the 
following  information:  (a)  a  description  of  the  property  in  reasonable 
detail;  (b)  the  date  or  dates  on  which  the  property  was  acquired,  and 
from  whom,  or,  if  constructed,  erected,  or  installed  by  the  taxpayer,  the 
dates  on  which  such  construction,  erection,  or  installation  was  begun  and 
completed;  (c)  evidence  establishing  the  intention  of  the  taxpayer  on  and 
after  April  6,  1917,  or  on  and  after  the  date  of  acquisition  or  the  date  of 
beginning  construction,  erection,  or  installation,  to  devote  such  property 
or  vessels  to  the  production  of  articles  (or,  in  the  case  of  vessels,  the 
transportation  of  articles  or  men)  contributing  to  the  prosecution  of  the 
present  war;  (d)  the  cost  of  construction,  erection,  installation,  or  acqui- 
sition; (e)  the  value  of  the  property  after  termination  of  the  amortiza- 
tion period;  (f)  a  segregation  of  property  which  will  have  no  value 
(except  for  salvage)  following  the  amortization  period,  and  of  property 
which  will  have  value  after  such  period  for  use  in  a  going  concern  or 
business;  (g)  all  deductions  from  gross  income  otherwise  taken  or  claimed 
with  respect  to  such  property;  (h)  the  computation  by  which  the  total 
amount  to  be  extinguished  by  amortization  was  determined;  and  (i)  the 
computation  by  which  the  proportion  of  the  amortization  charge  claimed 
as  deduction  in  the  taxable  year  for  which  return  is  being  made  was 
determined. 

Art.  187,  Reg.  45. 

17 


DEPLETION. 

DEFIiETION    OF    MINES,    OUm    AND    GAS    WEI.I^S,    OTHER    NATURAl^ 
DEPOSITS  AND  TIMBER. 

(Compare  Manual,  p.  243,  TJ  198.) 
(Items  of  Depletion  amplify  paragraphs  in  Manual.) 

Depletion  of  Mines,  Oil  and  Gas  Wells. — A  reasonable  deduction 
from  gross  income  for  the  depletion  of  natural  deposits  and  for 
the  depreciation  of  improvements  is  permitted,  based  (a)  upon  cost,  if 
acquired  after  February  28,  1913,  or  (b)  upon  the  fair  market  value  as 
of  March  1,  1913,  if  acquired  prior  thereto,  or  (c)  upon  the  fair  market 
value  within  30  days  after  the  date  of  discovery  in  the  case  of  mines,  oil 
and  gas  wells  discovered  by  the  taxpayer  after  February  8,  1913,  where 
the  fair  market  value  is  materially  disproportionate  to  the  cost.  The 
essence  of  this  provision  is  that  the  owner  of  such  property,  whether  it 
be  a  leasehold  or  freehold,  shall  secure  through  an  aggregate  of  annual 
depletion  and  depreciation  deductions  a  return  of  the  amount  of  capital 
invested  by  him  in  the  property,  or  in  lieu  thereof  an  amount  equal  to 
the  fair  market  value  as  of  March  1,  1913,  of  the  properties  owned  prior 
to  that  date,  or  an  amount  equal  to  the  fair  market  value  within  30  days 
after  the  date  of  discovery  of  mines,  oil  or  gas  wells  discovered  by  thv? 
taxpayer  on  or  after  March  1,  1913,  and  not  acquired  as  the  result  of 
purchase  of  a  proven  tract  or  lease,  where  the  fair  market  value  of  the 
property  is  materially  disproportionate  to  the  cost;  plus  in  any  case 
the  subsequent  cost  of  plant  and  equipment  (less  salvage  value),  and 
^  underground  and  overground  development,  which  is  not  chargeable  to 
current  operating  expense,  but  not  including  land  values  for  purposes 
other  than  the  extraction  of  minerals.  Operating  owners,  lessors,  and 
lessees  are  entitled  to  deduct  an  allowance  for  depletion,  but  a  stockholder 
in  a  mining  or  oil  or  gas  corporation  is  not. 

Art.  201,  Reg.  45. 

Capital  Recoverable  Through  Depletion  Allowance  in  the  Case  of 
Owner. — In  the  case  of  an  operating  owner  in  fee  or  a  lessor  the 
capital  remaining  in  any  year  recoverable  through  depletion  allowances; 
is  the  sum  of  (a)  the  cost  of  the  property,  or  its  fair  market  value  as 
of  March  1,  1913,  or  its  fair  market  value  within  30  days  after  discovery,, 
as  the  case  may  be,  plus  (b)  the  cost  of  subsequent  improvements  and 
development  not  charged  to  current  operating  expenses,  but  minus  (c)i 
deductions  for  depletion  which  have  or  should  have  been  taken  to  date,, 
and  (d)  the  portion  of  the  capital  account,  if  any,  as  to  which  depreciation 
has  been  and  is  being  deducted  instead  of  depletion.  The  value  of  the 
surface  of  the  land  should  be  taken  into  consideration.  In  no  case,  how- 
ever, may  a  lessor  take  deductions  for  depletion  in  any  year  during  the 
continuance  of  the  lease  in  excess  of  the  royalties  payable  thereimder 
for  such  year,  nor  may  he  include  in  his  capital  recoveral3le  through  such 
an  allowance  any  part  of  development  costs  not  borne  by  the  lessor. 

Art.  202,  Reg.  45. 

Capital  Recoverable  Through  Depletion  Allowance  in  the  Case  of 
Lessee. — In  the  case  of  a  lessee  the  capital  remaining  in  any  year 
recoverable  through  depletion  allowances  is  the  sum  of  (a)  the  cost  of 
the  leasehold,  or  its  fair  market  value  as  of  March  1,  1913,  or  its  fair 
>^  market  value  within  30  days  after  discovery,  as  the  case  may  be,  plus  (b) 
the  cost  of  subsequent  improvements  and  development  not  charged  to 
current  operating  expenses,  but  minus  (c)  deductions  for  depletion  which 
have  or  should  have  been  taken  to  date,  and  (d)  the  portion  of  the  capital 
account,  if  any,  as  to  which  depreciation  has  been  and  is  being  deducted 
instead  of  depletion.     Any  annual  or  periodical  rents   or  royalties  sup- 

18 


plementing  the  bonus  or  other  amount  paid  for  the  lease  may  be  charged 
to  current  operating  expenses  or  to  capital  account,  and  in  the  latter  event 
will  form  part  of  the  capital  returnable  through  deductions  for  depletion. 

Art.  203,  Reg.  45. 

Apportionment  of  Deductions  Between  Lessor  and  Lessee. — As  the 

value  of  property  comprehends  the  interests  of  both  lessor  and 
lessee,  no  computation,  for  the  purpose  of  depletion  allowances,  of  the 
value  of  these  interests  separately  as  of  any  date  which  combined  exceeds 
the  value  of  the  property  in  fee  simple  will  be  permitted.  The  same 
principle  applies  to  holders  of  fractional  interests.  If  the  aggregate 
deduction  claimed  is  deemed  excessive,  the  Commissioner  may  request  the 
owner  or  lessee  to  show  that  the  valuation  claimed  does  not  exceed  the 
fair  market  value  of  the  property  at  a  specified  date  determined  in  the 
manner  explained  in  article  206.  The  lessor  and  lessee  shall,  with  the 
approval  of  the  Commissioner,  equitably  apportion  the  allowance  in  the 
light  of  the  peculiar  conditions  in  each  case  and  on  the  basis  of  their 
respective  interests  therein.  To  the  return  of  every  taxpayer  claiming 
an  allowance  for  depletion  in  respect  of  (a)  property  in  which  he  owns  a 
fractional  interest  only  or  (b)  a  leasehold  or  (c)  property  subject  to  a 
lease,  there  shall  be  attached  a  statement  setting  forth  the  name  and 
address  and  the  precise  nature  of  the  holdings  of  each  person  interested 
in  the  property. 

Art.  204,  Reg.  45. 

Determination  of  Cost  of  Deposits. — In  any  case  in  which  a  deple- 
tion or  depreciation  deduction  is  computed  on  the  basis  of  the  cost 
or  price  at  which  any  mine,  mineral  deposit,  mineral  rights,  or  leasehold 
was  acquired,  the  owner  or  lessee  will  be  required  upon  request  of  th;3 
Commissioner  to  show  that  the  cost  or  price  at  which  the  property  was 
bought  was  fixed  for  the  purpose  of  a  bona  fide  purchase  and  sale,  by 
which  the  property  passed  to  an  owner,  in  fact  as  well  as  in  form,  dif- 
ferent from  the  vendor.  No  fictitious  or  inflated  cost  or  price  will  be 
permitted  to  form  the  basis  of  any  calculation  of  a  depletion  or  depre- 
ciation deduction,  and  in  determining  whether  or  not  the  price  or  cost 
at  which  any  purchase  or  sale  was  made  represented  the  actual  market 
value  of  the  property  sold,  due  weight  will  be  given  to  the  relationship 
or  connection  existing  between  the  person  selling  the  property  and  the 
buyer  thereof. 

Art.  205,  Reg.  45. 

Determination  of  Fair  Marlcet  Value  of  Deposits. — ^Where  the  fair 
market  value  of  the  property  at  a  specified  date  in  lieu  of  the  cost 
thereof  is  the  basis  for  depletion  and  depreciation  deductions,  such  value 
must  be  determined,  subject  to  approval  or  revision  by  the  Commissioner, 
by  the  owner  of  the  property  in  the  light  of  the  conditions  and  circum- 
stances known  at  that  date,  regardless  of  later  discoveries  or  develop- 
ments in  the  property  or  in  methods  of  mining  or  extraction.  The  value 
sought  should  be  that  established  assuming  a  transfer  between  a  willing 
seller  and  a  willing  buyer  as  of  that  particular  date.  No  rule  or  method 
of  determining  the  fair  market  value  of  mineral  property  is  prescribed,  but 
the  Commissioner  will  lend  due  weight  and  consideration  to  any  and  all 
factors  and  evidence  having  a  bearing  on  the  market  value,  such  as  cost, 
actual  sales  and  transfers  of  similar  properties,  market  value  of  stock 
or  shares,  royalties  and  rentals,  value  fixed  by  the  owner  for  purposes  of 
the  capital  stock  tax,  valuation  for  local  or  State  taxation,  partnership 
accountings,  records  of  litigation  in  which  the  value  of  the  property  was 
in  question,  the  amount  at  which  the  property  may  have  been  inventoried 
in  probate  court,  disinterested  appraisals  by  approved  methods,  and  other 
factors. 

Art.  206,  Reg.  45. 

19 


Revaluation  of  Deposits  Not  Allowed. — The  cost  of  the  property 
or  its  fair  market  value  at  a  specified  date,  as  the  case  may  be,  plus 
subsequent  charges  to  capital  account  not  deductible  as  current  expense, 
will  be  the  basis  for  determining  the  depletion  and  depreciation  deduc- 
tions for  each  year  during  the  continuance  of  the  ownership  under  which 
the  fair  market  value  or  cost  was  fixed,  and  during  such  ownership 
there  can  be  no  revaluation  for  the  purpose  of  this  deduction.  This  rule 
will  not  forbid  the  redistribution  of  the  capital  account  over  the  esti- 
mated number  of  units  remaining  in  the  property  in  accordance  with 
either  of  the  next  two  articles. 

Art  207,  Reg.  45. 

Determination  of  Quantity  of  Ore  in  Mine. — Every  taxpayer  claim- 
ing a  deduction  for  depletion  will  be  required  to  estimate  with  re- 
spect to  each  separate  property  the*  total  units  (tons,  pounds,  ounces,  or 
other  units)  of  ores  and  minerals  reasonably  known  or  on  good  evidence 
believed  to  have  existed  in  the  ground  on  March  1,  1913,  or  on  the  date  of 
acquisition  of  the  property,  or  within  30  days  after  the  date  of  discovery, 
as  the  case  may  be.  In  estimating  the  total  units  of  ores  and  minerals 
for  purposes  of  depletion  the  property  must  be  considered  in  the  condi- 
tion in  which  it  was  on  March  1,  1913,  or  the  date  of  acquisition,  or  within 
30  days  after  the  date  of  discovery,  but  if  subsequently  during  the  owner- 
ship of  the  taxpayer  making  the  return  additional  recoverable  mineral  de- 
posits have  been  discovered  or  developed  which  were  not  taken  into  ac- 
count in  estimating  the  number  of  units  for  purposes  of  depletion,  or  if 
it  shall  be  discovered  by  working,  development,  or  exploration  that  ground 
previously  estimated  to  contain  commercially  recoverable  mineral  is  barren 
or  contains  only  commercially  unworkable  mineral,  a  new  estimate  of  the 
recoverable  units  of  ores  or  minerals  shall  be  made  and  v/hen  made  shall 
thereafter  constitute  a  basis  for  depletion.  In  the  selection  of  the  unit 
of  estimate  the  custom  or  practice  applicable  to  the  type  of  mineral  de- 
posit and  the  character  of  the  operations  thereon  should  be  considered. 
The  estimate  of  the  recoverable  units  of  ores  or  minerals  for  the  pur- 
pose of  depletion  shall  include  (a)  the  ores  and  minerals  "in  sight," 
"blocked  out,"  "developed,"  or  "assured,"  in  the  usual  or  conventional 
meaning  of  these  terms  in  respect  of  the  type  of  deposit,  and  may 
also  include  (b)  "prospective"  or  "probable"  ores  and  minerals  (in  the 
same  sense),  i.  e.,  ores  and  minerals  that  are  believed  to  exist  on  the  basis 
of  good  evidence,  although  not  actually  known  to  occur  on  the  basis  of 
existing  developments,  but  "probable"  or  "prospective"  ores  and  minerals 
may  be  computed  for  purposes  of  depletion  only  as  extensions  of  known 
deposits  into  undeveloped  ground. 

Art.  208,  Reg.  45. 

Determination  of  Quantity  of  Oil  in  Ground. — In  the  case  of  either 
an  owner  or  lessee  it  will  be  required  that  an  estimate,  subject  to 
the  approval  of  the  Commissioner,  shall  be  made  of  the  probable  recover- 
able oil  contained  in  the  territory  with  respect  to  which  the  investment 
is  made  as  of  the  time  of  purchase,  or  as  of  March  1,  1913,  if  acquired 
prior  to  that  date,  or  within  30  days  after  the  date  of  discovery,  as  the 
case  may  be.  The  oil  reserves  must  be  estimated  for  all  undeveloped 
proven  land  as  well  as  producing  land.  If  information  subsequently  ob- 
tained clearly  shows  the  estimate  to  have  been  materially  erroneous,  it 
may  be  revised  with  the  approval  of  the  Commissioner. 

Art.  209,  Reg.  45. 

Computation  of  Allowance  for  Depletion  of  Mines  and  Oil  Wells. — 

When  the  cost  or  value  as  of  March  1,  1913,  or  within  30  days  after 
the  date  of  discovery  of  the  property  shall  have  been  determined,  and  the 
number  of  mineral  units  in  the  property  as  of  the  date  of  acquisition  or 
valuation  shall  have  been  estimated,  the  division  of  the  former  amount 

20 


by  the  latter  figure  will  give  the  unit  value  for  purposes  of  depletion, 
and  the  depletion  allowance  for  the  taxable  year  may  be  computed  by 
multiplying  such  unit  value  by  the  number  of  units  of  mineral  extracted 
during  the  year.  If,  however,  proper  additions  are  made  to  the  capital 
account  represented  by  the  original  cost  or  value  of  the  property,  or  un- 
foreseen extraordinary  circumstances  necessitate  a  revised  estimate  of  the 
number  of  mineral  units  in  the  ground,  a  new  unit  value  for  purposes  of 
depletion  may  be  found  by  dividing  the  capital  account  at  the  end  of  the 
year,  less  deductions  for  depletion  to  the  beginning  of  the  taxable  year 
«vhich  have  or  should  have  been  taken,  by  the  number  of  units  in  the 
ground  at  the  beginning  of  the  taxable  year.  This  number,  unless  a  re- 
vision of  the  original  estimate  has  been  necessary,  will  equal  the  number 
of  units  in  the  ground  at  the  date  of  original  acquisition  or  valuation  less 
the  number  extracted  prior  to  the  taxable  year.  If,  however,  a  recalcula- 
tion is  needed,  the  number  of  units  at  the  beginning  of  the  year  will  be 
the  sum  of  the  gross  production  of  the  year  and  the  estimated  mineral 
reserves  in  the  property  at  the  end  of  the  year. 

Art.  210,  Reg.  45. 


Computation  of  Allowance  for  Depletion  of  Gas  Wells. — On  account 
of  the  peculiar  condition  surrounding  the  production  of  natural 
gas  it  will  be  necessary  to  compute  the  depletion  allowances  for  gas 
properties  by  methods  suitable  to  the  particular  cases  in  question  and 
acceptable  to  the  Commissioner.  Usually,  the  depletion  of  natural  gas 
properties  should  be  computed  on  the  basis  of  decline  in  closed  or  rock 
pressure,  taking  into  account  the  effects  of  water  encroachment  and  any 
other  modifying  factors.  The  following  methods  may  also  be  used.  In 
many  fields  more  or  less  additional  evidence  on  depletion  is  to  be  had 
from  such  considerations  as  (a)  details  of  production  (performance  record 
of  well  or  property) ;  (b)  decline  in  open  flow  capacity;  (c)  comparison 
with  life  histories  of  similar  wells  or  properties,  particularly  those  now 
exhausted;  and  (d)  size  of  reservoir  and  pressure  of  gas.  In  using  the 
closed  pressure  decline  method,  the  pressure  at  which  wells  are  aban- 
doned may  be  subtracted  from  the  observed  pressures  in  order  to  determine 
the  correct  percentages.  The  estimates  for  properties  in  certain  fields  are 
subject  to  some  further  correction  for  various  reasons,  among  which  are 
(a)  irregular  encroachment  of  water  or  oil  which  reduces  the  rate  of  de- 
cline in  pressure;  (b)  even  though  there  be  no  encroachment  of  oil  or 
water,  the  size  of  the  reservoir  remaining  fixed,  the  pressure  decline  aoes 
not  follow  in  exact  and  precise  proportion  to  the  amount  withdrawn;  and 
(c)  as  a  rule  less  gas  is  marketed  for  50  pounds  of  decline  in  the  early 
history  of  the  well  than  during  the  decline  of  a  siniilar  amount  in  the 
later  history  or  after  the  pressure  has  become  low.  The  gas  producer  will 
be  expected  to  compute  the  depletion  as  accurately  as  possible  and  submit 
with  his  return  a  description  of  the  method  by  which  the  computation  was 
made.  The  following  formula,  in  which  the  units  of  gas  are  pounds  per 
square  inch  of  closed  pressure,  may  be  used  and  is  recommended:  the 
quotient  of  the  capital  account  recoverable  through  depletion  allowances 
to  the  end  of  the  taxable  year,  divided  by  the  sum  of  the  pressure  at  the 
beginning  of  the  year  less  the  sum  of  the  pressures  at  the  time  of  ex- 
pected abandonment  (which  quotient  is  the  unit  cost),  multiplied  by  the 
sum  of  the  pressures  at  the  beginning  of  the  taxable  year  plus  the  sum 
of  the  pressures  of  new  wells  less  the  sum  of  the  pressures  at  the  end 
of  the  tax  year,  equals  the  depletion  allowance. 

Art.  211,  Reg.  45. 
21 


Procedure  for  Computation  of  Depletion  of  Gas  Wells  in  the  Future. 

— ^A  closed  pressure  reading  of  a  gas  well  which  has  been  produc- 
ing, or  is  near  gas  wells  that  have  been  producing,  is  reduced  to  a  greater 
or  less  extent,  depending  on  its  location  and  the  length  of  time  it  has  been 
closed  in.  To  get  readings  most  useful  for  tax  purposes  it  is  necessary  to 
record  the  len^h  of  time  the  well  has  been  closed  and  to  show  how  the 
pressure  built  up  during  this  period.  Several  readings  at  successive  times 
will  tend  to  indicate  the  point  at  which  the  pressure  becomes  approxi- 
mately stationary,  that  is,  the  point  at  which  the  closed  pressure  ap- 
proaches as  nearly  as  possible  the  maximum  pressure  which  would  be 
shown  if  the  well  and  all  others  in  the  pool  were  closed  for  several 
months.  The  length  of  time  required  varies  of  course  with  the  character 
of  the  sand,  position  of  the  packer,  the  location  of  the  well  with  reference 
to  other  wells,  the  limits  of  the  pool,  and  other  considerations.  The  depth 
of  the  well,  diameter  of  tubing,  and  line  pressure  when  the  well  was  shut 
off  should  be  noted.  Beginning  with  1919,  closed  pressure  readings  of 
representative  wells,  if  not  of  all  wells,  must  be  carefully  made  and  kept. 
In  order  to  standardize  pressure  readings,  the  well  should  remain  closed 
until  such  time  as  the  pressure  will  not  build  up  more  than  1  per  cent  of 
the  total  pressure  in  10  minutes.  Ordinarily  24  hours  will  suffice  for  this 
purpose,  but  some  wells  will  need  to  remain  closed  for  a  longer  period. 
If  there  is  any  water  in  the  well  it  should  be  blown  or  pumped  off  before 
the  well  is  closed.  Since  readings  at  the  exact  end  of  the  fiscal  year  will 
ordinarily  not  be  available,  the  pressure  of  that  date  may  be  obtained  by 
interpolation  or  extrapolation,  or  in  certain  cases  readings  taken  regularlj 
in  September  or  some  other  month  may  be  applicable  to  the  end  of  the 
fiscal  or  tax  year.  As  a  general  rule  September  closed  pressure  readingi 
taken  regularly  furnish  the  best  indication  of  depletion  and  it  is  recom* 
mended  that  such  readings  be  made  with  especial  regularity  and  care. 
Where  interpolated  readings  are  used  the  data  from  which  they  are  ob- 
tained should  be  given.  Gauges  should  be  of  appropriate  capacity  consid- 
ering the  pressure  to  be  measured  and  should  be  frequently  tested.  Record 
should  be  kept  of  the  numbers  of  the  gauges,  dates  the  gauges  were 
tested,  names  of  men  testing,  and  other  significant  details. 

Art.  212,  Reg.  45. 

Computation  of  Allowance  Where  Quantity  of  Oil  or  Gas  Uncertain. 

— If  for  any  reason  the  quantity  of  oil  or  gas  on  the  property  can 
not  be  determined  with  any  degree  of  certainty,  thus  precluding  the  use 
of  the  unit  cost  method  of  computing  depletion,  the  depletion  deduction 
may  be  computed  in  accordance  with  some  other  method  or  rule  satis- 
factory to  the  Commissioner.  In  case  any  method  other  than  the  unit 
cost  method  is  proposed  to  be  used  by  the  taxpayer  in  computing  his  de- 
pletion allowance,  a  full  description  of  the  method  used  must  be  submitted 
with  the  return,  together  with  a  summary  of  the  figures  or  calculations 
pertaining  to  such  computation. 

Art.  213,  Reg.  45. 

Computation  of  Depletion  Allowance  for  Combined  Holdings  of 
Oil  and  Gas  Wells. —  (1)  Oil  Properties. — The  recoverable  oil  belonging 
to  the  taxpayer  shall  be  estimated  separately  on  the  smallest  unit  on 
which  data  are  available,  such  as  individual  wells  or  tracts,  and  these 
added  together  into  a  grand  total  to  be  applied  to  the  total  capital  account 
returnable  through  depletion.  The  capital  account  shall  include  the  cost 
or  value,  as  the  case  may  be,  of  all  oil  or  gas  leases  or  rights  within  the 
United  States  and  its  possessions,  plus  all  incidental  costs  of  development 
not  charged  as  expense  nor  returnable  through  depreciation.  The  unit 
value  of  the  total  recoverable  oil  or  gas  is  the  quotient  obtained  by  divid- 
ing the  total  capital  account  recoverable  through  depletion  by  the  total 

22 


estimated  recoverable  oil  or  gas.  This  unit  multiplied  by  the  total  number 
of  units  of  oil  or  gas  produced  by  the  taxpayer  during  the  taxable  year 
from  all  of  the  oil  and  gas  properties  will  determine  the  amount  which 
may  be  allowably  deducted  from  the  gross  income  of  that  year.  This 
total  depletion  allowance  divided  by  the  total  capital  account  returnable 
through  depletion  will  give  the  percentage  of  depletion  for  the  taxable 
year.  This  percentage  must  be  applied  to  the  capital  account  returnable 
through  depletion  of  each  separate  leasehold  and  fee  property  included  in 
the  holdings  of  the  taxpayer  to  find  the  proper  amount  deductible  for 
depletion  from  the  capital  account  of  each  tract  at  the  end  of  the  taxable 
year. 

(2)  Gas  Properties. — In  the  case  of  the  gas  properties  of  a  taxpayer  the 
depletion  allowance  for  each  pool  may  be  computed  by  using  the  com- 
bined capital  account  returnable  through  depletion  of  all  the  tracts  of  gas 
land  owned  by  the  taxpayer  in  the  pool  and  the  average  decline  in  rock 
pressures  of  all  the  taxpayer's  wells  in  such  pool  as  in  the  formula  given 
in  article  211.  The  total  allowance  for  depletion  of  the  gas  properties  of 
the  taxpayer  will  be  the  sum  of  the  amounts  computed  for  each  pool. 

Art.  214,  Reg.  45. 

Depletion  of  Mine  Based  on  Advance  Royalties. — Where  the  owner 
has  leased  a  mining  property  for  a  term  of  years  with  a  require- 
ment in  the  lease  that  the  lessee  shall  mine  and  pay  for  annually  a 
specified  number  of  tons  or  other  agreed  units  of  measurement  of  such 
mineral,  or  shall  pay  annually  a  specified  sum  of  money  which  shall  be 
applied  in  payment  of  the  purchase  price  or  agreed  royalty  per  unit  of 
such  mineral  whenever  the  same  shall  thereafter  be  mined  and  removed 
from  the  leased  premises,  the  value  in  the  ground,  to  the  lessor  for  pur- 
poses of  depletion  of  the  number  of  units  so  paid  for  in  advance  of  mining 
will  constitute  an  allowable  deduction  from  the  gross  income  of  the  year 
in  which  such  payment  or  payments  shall  be  made;  but  no  deduction  for 
depletion  by  the  lessor  shall  be  claimed  or  allowed  in  any  subsequent  year 
on  account  of  the  mining  or  removal  in  such  year  of  any  ore  or  mineral 
so  paid  for  in  advance  and  for  which  deduction  has  been  once  made.  If 
for  any  reason  any  such  mining  lease  shall  be  terminated  before  the  ore 
or  mineral  therein  which  has  been  paid  for  in  advance  has  been  niined 
and  removed,  and  the  lessor  repossesses  the  leased  property,  an  amount 
equal  to  the  aggregate  deductions  for  depletion  allowed  in  respect  of 
ore  or  mineral  not  mined  and  removed  by  the  lessee,  but  still  in  the  ground, 
will  be  deemed  income  to  the  lessor  and  will  be  returned  as  such  ior  the 
year  in  which  the  property  is  repossessed. 

Art.  215,  Reg.  45. 

Depletion  Account  on  Books. — Every  taxpayer  claiming  and  making 
a  deduction  for  depletion  and  depreciation  of  mineral  property  shall 
keep  accurate  ledger  accounts  in  which  shall  be  charged  the  fair 
market  value  as  of  March  1,  1913,  or  within  30  days  after  the  date  of 
discovery,  or  the  cost,  as  the  case  may  be,  (a)  of  the  property,  and 
(b)  of  the  plant  and  equipment,  together  with  such  amounts  expended  for 
development  of  the  property  or  additions  to  plant  and  equipment  since 
that  date  as  have  not  been  allowed  as  expense  in  his  returns.  These  ac- 
counts shall  be  credited  with  the  amount  of  the  depreciation  and  deple- 
tion deductions  claimed  and  allowed  each  year,  or  the  amount  of  the  de- 
preciation and  depletion  shall  be  credited  to  depletion  and  depreciation 
reserve  accounts,  to  the  end  that  when  the  sum  of  the  credits  for  deple- 
tion and  depreciation  equals  the  value  or  cost  of  the  property,  plus  the 
amount  added  thereto  for  development  or  additional  plant  and  equipment, 
less  salvage  value  of  the  physical  property,  no  further  deduction  for  de- 
pletion  and  depreciation  with  respect  to  the  property  will  be  allowed. 

23 


If  dividends  are  paid  out  of  a  depletion  or  depreciation  reserve,  the  stock- 
holders must  be  expressly  notified  that  the  dividend  is  a  return  of  capital 
and  not  an  ordinary  dividend  out  of  profits.  See  article  1548  of  Reg.  45, 
which  provides  in  part  that  any  distribution  made  from  depletion  or 
depreciation  reserve  is  considered  as  a  liquidating  dividend  and  not 
as  a  part  of  surplus  out  of  which  ordinary  dividends  may  be  paid. 

Art.  216,  Reg.  45. 

Statement  to  be  Attached  to  Return  Where  Depletion  of  Mine 
Claimed. — To  the  return  of  the  taxpayer  claiming  a  deduction  for 
depletion  or  depreciation  or  both  there  should  be  attached  a  statement 
setting  out:  (a)  whether  the  owner  is  a  fee  owner  or  lessee  or  both; 
(b)  a  description  of  the  property  owned  in  fee,  if  any,  and  a  description 
of  the  leasehold  property,  if  any,  including  the  date  of  acquisition  and  the 
date  of  expiration  of  the  lease;  (c)  the  fair  market  value  as  of  March  1, 
1913,  or  within  30  days  of  the  date  of  discovery,  or  the  cost,  as  the  case 
may  be,  of  the  property  owned  in  fee  and  the  leasehold  property,  to- 
gether with  a  statement  of  the  precise  method  by  which  the  value  or  the 
cost  of  freehold  and  leasehold  property  was  determined;  (d)  the  estimated 
nimiber  of  units  of  mineral  or  ore  at  the  date  of  acquisition  or  of  valua- 
tion in  the  property  owned  in  fee  and  in  the  leasehold  property  separately, 
gether  with  a  statement  of  the  precise  method  by  which  the  value  or  the 
case  the  number  of  units  of  mineral  or  ore  tor  purposes  of  depletion; 
(e)  the  amount  of  capital  applicable  to  each  unit;  (f)  the  number  of 
units  removed  and  sold  during  the  year  for  which  the  return  was  made; 
(g)  the  total  amount  deducted  on  account  of  depletion  and  on  account  of 
depreciation,  stated  separately,  up  to  the  taxable  year  during  the  owner- 
ship of  the  taxpayer;  and  (h)  any  other  data  which  would  be  helpful  in 
determining  the  reasonableness  of  the  depletion  and  depreciation  deduc- 
tions claimed  in  the  return. 

Art.  217,  Reg.  45. 

Statement  to  be  Attached  to  Return  Where  Depletion  of  Oil  or 
Gas  Claimed. — To  each  return  made  by  a  person  owning  or  operating 
oil  or  gas  properties,  there  should  be  attached  a  statement  showing  for 
each  property  the  following  information,  which  may  be  given  in  the  form 
of  a  table,  if  desired,  by  taxpayers  owning  more  than  one  property: 
(a)  the  fair  market  value  of  the  property  (exclusive  of  machinery,  equip- 
ment, etc.,  and  the  value  of  the  surface  rights)  as  of  March  1,  1913,  if 
acquired  prior  to  that  date;  or  the  fair  market  value  of  the  property 
within  30  days  after  the  date  of  discovery;  or  the  actual  cost  of  the 
property,  if  acquired  subsequently  to  February  28,  1913,  and  not  covered 
by  the  foregoing  clause;  (b)  how  the  fair  market  value  was  ascertained, 
if  the  property  came  under  the  first  or  second  head  under  (a) ;  (c)  the 
estimated  quantity  of  oil  or  gas  in  the  property  at  the  time  that  the 
value  or  cost  was  determined;  (d)  the  name  and  address  of  the  person 
making  the  estimate  and  the  manner  in  which  this  estimate  was  made, 
including  a  summary  of  the  calculations;  (e)  the  amount  of  capital  applic- 
able to  each  unit  (this  being  found  by  dividing  the  value  or  cost,  as  the 
case  may  be,  by  the  estimated  number  of  units  of  oil  or  gas  in  the  prop- 
erty at  the  time  the  value  or  cost  was  determined) ;  (f)  the  quantity  of  oil 
or  gas  produced  during  the  year  for  which  the  return  is  made  (in  the 
case  of  new  properties  it  is  desirable  that  this  information  be  furnished 
by  months) ;  (g)  the  number  of  acres  of  producing  and  proven  oil  or 
gas  land;  (h)  the  number  of  wells  producing  at  the  beginning  and  end 
of  the  taxable  year;  (i)  the  date  of  completion  of  wells  finished  during 
the  taxable  year;  (j)  the  date  of  abandonment  of  all  wells  abandoned 
during  the  taxable  year;  (k)  a  property  map  nhowing  the  location  of  the 
property  and  of  the  producing  and  abandoned  wells,  dry  holes,  and  proven 

24 


oil  and  gas  land;  (1)  the  average  gravity  of  the  oil  produced  on  the  tract; 
(m)  the  number  of  pay  sands  and  average  thickness  of  each  pay  sand  or 
zone  on  the  property;  (n)  the  average  depth  to  the  top  of  each  of  the 
different  pay  sands;  (o)  any  data  regarding  change  in  operating  condi- 
tions, such  as  flooding,  use  of  compressed  air,  vacuum,  shooting,  etc.,  which 
have  a  direct  effect  on  the  production  of  the  property;  (p)  the  monthly 
or  annual  production  of  individual  wells  and  the  initial  daily  production 
of  new  wells  (this  is  highly  desirable  information  and  should  be  furnished 
wherever  possible) ;  (q)  (for  the  first  year  in  which  the  above  informa- 
tion is  filed  for  a  property  which  was  producing  prior  to  the  taxable  year 
covered  by  the  above  statement  the  following  information  must  be  fur- 
nished) annual  production  of  the  tract  or  of  the  individual  wells,  if  the 
latter  information  is  available,  from  the  beginning  of  its  productivity  to 
the  beginning  of  the  taxable  year  for  which  the  return  was  filed;  the 
average  number  of  wells  producing  during  each  year;  and  the  initial  daily 
production  of  each  well;  and  (r)  any  other  data  which  will  be  helpful  in 
determining  the  reasonableness  of  the  depletion  deduction.  When  a  tax- 
payer has  filed  adequate  maps  with  the  Commissioner  he  may  be  relieved 
of  filing  further  maps  of  the  same  properties,  provided  all  additional  in- 
formation necessary  for  keeping  the  maps  up  to  date  is  filed  each  year. 
This  includes  records  of  dry  holes,  as  well  as  producing  wells,  together 
with  logs,  depth,  and  thickness  of  sands,  location  of  new  wells,  etc. 
By  "production"  is  meant  gross  production  of  all  oil  or  gas  recovered  from 
the  wells  and  tanked  or  utilized.  In  those  leases  where  no  account  is 
kept  of  the  oil  or  gas  used  for  fuel,  the  gross  production  will  necessarily 
be  that  remaining  after  the  fuel  used  in  the  property  has  been  taken  out. 
In  cases  of  this  kind  an  estimate  of  the  fuel  used  from  each  tract  should 
be  given  for  each  year. 

Art.  218,  Reg.  45. 


Discovery  of  Mine. — The  discovery  of  a  mine  or  a  natural  deposit 
of  mineral,  whether  it  be  made  by  an  owner  of  the  land  or  by  a 
lessee,  shall  be  deemed  to  mean  (a)  the  bona  fide  discovery  of  a  com- 
mercially valuable  deposit  of  ore  or  mineral  of  a  value  materially  in 
excess  of  the  cost  of  discovery  in  natural  exposure  or  by  drilling  or  -Dther 
exploration  conducted  above  or  below  ground,  or  (b)  the  development  and 
proving  of  a  mineral  or  ore  deposit  which  has  been  abandoned  or  ap- 
parently worked  out,  or  sold,  leased,  or  otherwise  disposed  02,  by  an 
owner  or  lessee  prior  to  the  development  of  a  body  of  ore  or  mineral  of 
sufficient  size,  quality,  and  character  to  determine  it,  in  connection  with 
the  physical  and  geological  conditions  of  its  occurrence,  to  be  a  mineable 
deposit  of  ore  or  mineral  having  a  value  materially  in  excess  of  the  cost 
of  the  proving  and  development.  In  determining  whether  a  discovery  has 
been  made  the  Commissioner  will  take  into  account  the  peculiar  conditions 
of  the  case,  and  every  taxpayer  claiming  the  value  of  a  mineral  deposit  on 
the  date  of  discovery  or  within  30  days  thereafter  for  purposes  of  de- 
pletion will  be  required  to  attach  to  his  return  a  statement  setting  forth 
the  conditions  and  circumstances  of  the  discovery  and  the  size,  character, 
and  location  of  the  deposit,  together  with  the  cost  of  discovery,  its  value, 
and  the  precise  method  used  in  determining  the  value. 

Art.  219,  Reg.  45. 

Discovery  of  Oil  and  Gas  Wells. — In  order  to  take  advantage  of 
his  discovery  on  or  after  March  1,  1913,  of  oil  or  gas  wells,  the  tax- 
payer must  show  (a)  that  the  tract  for  which  such  valuation  is  claimed 
was  not  as  to  the  particular  sand  or  zone  discovery  of  which  is  claimed 
proven  oil  land  at  the  time  the  so-called  discovery  was  made,  proven  oil 
land  being  that  which  has  been  shown  by  finished  wells,  supplemented  by 
geologic  data,  to  be  such  that  other  wells  drilled  thereon  are  practically 

25 


certain  to  be  commercial  producers;  (b)  that  the  discovery  was  a  bona  fide 
discovery  of  a  commercial  well  of  oil  or  gas  or  both  of  these  substances 
on  the  property  in  question,  a  commercial  well  being  one  whose  production 
is  such  as  to  offer  a  reasonable  expectation  of  at  least  returning  the  capital 
invested  in  such  well  through  the  sale  of  the  oil  or  gas  or  both  derived 
therefrom  during  its  economic  life;  and  (c)  that  the  fair  market  value  of 
the  property  was  materially  in  excess  of  the  cost. 

Art.  220,  Reg.  45. 

Proof  of  Discovery  of  Oil  and  Gas  Wells. — In  order  to  meet  the 
requirements  of  the  preceding  article  to  the  satisfaction  of  the  Com- 
missioner, the  taxpayer  will  be  required,  among  other  things,  to  submit  the 
following  with  his  return:  (a)  a  map  of  convenient  scale,  showing  the 
location  of  the  tract  and  discovery  well  in  question  and  of  the  nearest  pro- 
ducing well,  and  the  development  for  a  radius  of  at  least  3  miles  from  the 
tract  in  question,  both  on  the  date  of  discovery  and  on  the  date  when  the 
fair  market  value  was  set;  (b)  a  certified  copy  of  the  log  of  the  discovery 
well,  showing  the  location,  the  date  drilling  began,  the  date  of  completion 
and  beginning  of  production,  the  formations  penetrated,  the  oil,  gas,  and 
water  sands  penetrated,  the  casing  record,  and  any  other  information  tend- 
ing to  show  the  condition  of  the  well  on  the  date  the  discovery  was 
claimed;  (c)  the  logs  of  enough  other  wells  drilled  prior  to  the  date  of 
completion  of  the  discovery  in  the  vicinity  of  the  discovery  well  to  con- 
vince the  Commissioner  that  the  sand  or  zone  discovery  of  which  is  claimed 
was  not  known  prior  to  the  so-called  discovery;  (d)  a  sworn  record  of 
production,  clearly  proving  the  commercial  productivity  of  the  discovery 
well;  (e)  a  sworn  copy  of  the  records,  showing  the  cost  of  the  property; 
and  (f)  a  full  explanation  of  the  method  of  determining  the  value  on  the 
late  of  discovery  or  within  30  days  thereafter,  supported  by  satisfactory 
evidence  of  the  fairness  of  this  value. 

Art.  221,  Reg.  45. 

Charges  to  Capital  and  to  Expense  in  the  Case  of  Mine. — In  the 

case  of  mining  operations  all  expenditures  for  plant  equipment, 
development,  rent,  and  royalty  prior  to  production,  and  thereafter  all  major 
items  of  plant  and  equipment,  shall  be  charged  to  capital  account  for 
purposes  of  depletion  and  depreciation.  After  a  mine  has  been  developed 
and  equipped  to  its  normal  and  regular  output  capacity,  however,  the  cost 
of  additional  minor  items  of  equipment  and  plant,  including  mules,  motors, 
mine  cars,  trackage,  cables,  trolley  wire,  fans,  small  tools,  etc.,  necessary 
to  maintain  the  normal  output  because  of  increased  length  of  haul  or 
depth  of  working  consequent  on  the  extraction  of  mineral,  and  the  cost  of 
replacement  of  these  and  similar  minor  items  of  worn-out  and  discarded 
blant  and  equipment,  may  be  charged  to  current  expense  of  operations. 

Art.  222,  Reg.  45. 

Charges  to  Capital  and  to  Expense  in  the  Case  of  Oil  and  Gas 
Wells. — Such  incidental  expenses  as  are  paid  for  wages,  fuel,  repairs, 
hauling,  etc.,  in  connection  with  the  exploration  of  the  property,  drilling 
of  wells,  building  of  pipe  lines,  and  development  of  the  property  may  at 
the  option  of  the  taxpayer  be  deducted  as  an  operating  expense  or  charged 
to  the  capital  account  returnable  through  depletion.  If  in  exercising 
this  option  the  taxpayer  charges  these  incidental  expenses  to  capital  ac- 
count, in  so  far  as  such  expense  is  represented  by  physical  property,  it 
may  be  taken  into  account  in  determining  a  reasonable  allowance  for  de- 
preciation. The  cost  of  drilling  nonproductive  wells  may  be  at  the  option  of 
the  operator  be  deducted  from  gross  income  as  an  operating  expense  or 
charged  to  capital  accounts  returnable  through  depletion  and  depreciation 
as  in  the  case  of  productive  wells.     Casing -head -gas  contracts  have  been 

26 


construed  to  be  tangible  assets  and  their  cost  may  be  added  to  the  capital 
account  returnable  through  depletion,  following  the  rate  set  by  the  oil  wells 
from  which  the  gas  is  derived,  or,  if  the  life  of  the  contract  is  shorter  than 
the  reasonable  expectation  of  the  life  of  the  wells  furnishing  the  gas,  the 
capital  invested  in  the  contract  may  be  written  off  through  yearly  allow- 
ances equitably  distributed  over  the  life  of  the  contract.  All  oil  pro- 
duced during  the  taxable  year,  whether  sold  or  unsold,  must  be  considered 
in  the  computation  of  the  depletion  allowance  for  the  taxable  year. 

Art.  223,  Reg.  45. 

Depreciation  of  Improvements  in  the  Case  of  Mine. — It  shall  be 
optional  with  the  taxpayer,  subject  to  thie  approval  of  the  Commissioner, 
(a)  whether  the  cost  or  value  of  the  mining  property,  including  ores  and 
minerals,  plant  and  equipment,  and  charges  and  additions  to  capital  ac- 
count not  charged  to  expense  and  deducted  as  expense  on  the  returns  of  the 
taxpayer,  shall  be  recovered  at  a  rate  established  by  current  exhaustion  of 
mineral,  or  (b)  whether  the  cost  or  value  of  the  mineral  and  charges  to 
capital  account  of  expenditures  other  than  for  physical  property  shall  be 
recovered  by  appropriate  charges  based  on  depletion  and  the  cost  or  value 
of  plant  and  equipment  shall  be  recovered  by  reasonable  charges  for  de- 
preciation calculated  by  the  usual  rules  for  depreciation  qj  according  to  the 
peculiar  conditions  of  the  taxpayers'  case  by  a  method  satisfactory  to  the 
Commissioner.  Nothing  in  these  regulations  shall  be  interpreted  to  mean 
that  the  value  of  a  mining  plant  and  equipment  may  be  reduced  by  de- 
preciation or  depletion  deductions  to  a  sum  below  the  value  of  the  salvage 
when  the  property  shall  have  become  obsolete  or  shall  have  been  abandoned 
for  the  purpose  of  mining,  or  that  any  part  of  the  value  of  land  for  pur- 
poses other  than  mining  may  be  recoverable  through  depletion  or  de- 
preciation. 

Art.  224,  Reg.  45. 

Depreciation  of  Improvements  in  the  Case  of  Oil  and  Gas  Wells. 

— Both  owners  and  lessees  operating  oil  or  gas  properties  will,  in 
addition  to  and  apart  from  the  deduction  allowable  for  the  depletion  or 
return  of  capital  as  hereinbefore  provided,  be  permitted  to  deduct  a 
reasonable  allowance  for  depreciation  of  physical  property,  such  as  ma- 
chinery, tools,  equipment,  pipes,  etc.,  so  far  as  not  in  conflict  with  the 
option  exercised  by  the  taxpayer  under  article  223.  The  amount  deducti- 
ble on  this  account  shall  be  such  an  amount  based  upon  its  capitalized 
value  or  cost  equitably  distributed  over  its  useful  life  as  will  bring  such 
property  to  its  true  salvage  value  when  no  longer  useful  for  the  purpose 
for  which  such  property  was  acquired.  Accordingly,  where  it  can  be  shown 
to  the  satisfaction  of  the  Comftiissioner  that  the  reasonable  expectation  of 
the  economic  life  of  the  oil  or  gas  deposit  with  which  the  property  is  con- 
nected is  shorter  than  the  normal  useful  life  of  the  physical  property,  the 
amount  annually  deductible  for  depreciation  may  for  such  property  be 
based  upon  the  length  of  life  of  the  deposit.  See  articles  161-171  of 
Regulations  45,  covering  depreciation. 

Art.  225,  Reg.  45. 

Depletion  and  Depreciation  of  Oil  and  Gas  Wells  in  Years  Before 
1916. — If  upon  examination  it  is  found  that  in  respect  of  the  entire 
drilling  cost  of  wells,  including  physical  property  and  incidental  expenses, 
between  March  1,  1913,  and  December  31,  1915,  a  taxpayer  has  been 
allowed  a  reasonable  deduction  sufficient  to  provide  for  the  elements  of 
exhaustion,  wear  and  tear,  and  depletion,  it  will  not  be  necessary  to  re- 
open the  returns  for  years  prior  to  1916  in  order  to  show  separately  in 
these  years  the  portions  of  such  deductions  representing  depletion  and 

27 


depreciation,  respectively.  Such  separation  will  be  required  to  be  made 
of  the  reserves  for  depreciation  at  January  1,  1916,  and  proper  allocation 
between  depreciation  and  depletion  must  be  maintained  after  that  date. 
In  any  case  in  which  it  is  found  that  the  deductions  taken  between  March 
1,  1913,  and  December  31,  1915,  are  not  reasonable,  amended  returns  may 
be  required  for  these  years. 

Art.  226,  Reg.  45. 

Depletion  of  Timber. — A  reasonable  deduction  from  gross  income 
for  the  depletion  of  timber  and  for  the  depreciation  of  improvements 
is  permitted,  based  (a)  upon  cost  if  acquired  after  February  28,  1913,  or 
(b)  upon  the  fair  market  value  as  of  March  1,  1913,  if  acquired  prior 
thereto.  The  essence  of  this  provision  is  that  the  owner  of  timber  prop- 
erty, whether  it  be  a  leasehold  or  a  freehold,  shall  secure  through  an  ag- 
gregate of  annual  depletion  and  depreciation  deductions  a  return  of  the 
amount  of  capital  invested  by  him  in  the  property,  or  in  lieu  thereof  an 
amount  equal  to  its  fair  market  value  as  of  March  1,  1913,  plus  in  any 
case  the  subsequent  cost  of  plant,  equipment,  and  development  which  is 
not  chargeable  to  currentoperating  expenses,  but  not  including  cut-over 
land  values. 

Art.  227,  Reg.  45. 

Capital  Recoverable  Through  Depletion  Allowance  in  the  Case  of 
Timber. — In  general,  the  capital  remaining  in  any  year  recoverable 
through  depletion  allowances  may  be  determined  as  indicated  in  articles 
202  and  203  (Capital  Recovered  by  Owmer  or  Lessee  Through  Depletion). 
In  the  case  of  leases  the  apportionment  of  deductions  between  the 
lessor  and  lessee  should  be  made  as  specified  in  article  204.  Where 
it  becomes  necessary  to  determine  the  cost  or  fair  market  value  as 
of  March  1,  1913,  of  the  property,  the  rules  laid  down  in  articles  205  and 
206  shoidd  be  followed  so  far  as  possible. 

Art.  228,  Reg.  45. 

Computation  of  Allowance  for  Depletion  of  Timber. — An  allowance 
for  the  depletion  of  timber  in  any  taxable  year  shall  be  based  upon 
the  number  of  feet  of  stumpage  cut  during  the  year  and  the  unit 
cost  of  the  stumpage  at  the  date  of  acquisition  or  the  unit  market 
value  on  March  1,  1913,  if  acquired  prior  thereto.  The  unit  market  value 
as  of  March  1,  1913,  shall  be  the  unit  price  at  which  the  standing  timber 
in  its  then  condition  and  in  view  of  its  then  environment  could  have 
been  sold  for  cash  or  its  equivalent.  The  amount  of  the  deduction  for 
depletion  in  any  taxable  year  shall  be  the  product  of  the  number  of  feet 
of  stumpage  cut  during  the  year  multiplied  by  such  unit  cost  or  market 
value  of  the  stumpage. 

Art.  229,  Reg.  45. 

Revaluation  of  Stumpage. — The  fair  market  value  of  stumpage 
when  determined  as  of  March  1,  1913,  for  the  purpose  of  depletion 
allowances  in  the  case  of  timber  acquired  prior  thereto,  shall  be  the  basis 
for  the  determining  the  depletion  deduction  for  each  year  during  the  con- 
tinuance of  the  ownership  under  which  the  fair  market  value  of  the 
stumpage  was  fixed,  and  during  such  ownership  there  can  be  no  redetermi- 
nation of  the  fair  market  value  of  the  stumpage  for  such  purpose.  How- 
ever, the  unit  market  value  of  stumpage  adopted  by  the  taxpayer  may 
subsequently  be  changed  if  from  any  cause  such  value,  if  continued  as  a 
basis  of  depletion,  should  upon  evidence  satisfactory  to  the  Commissioner 
be  found  inadequate  or  excessive  for  the  extinguishment  of  the  fair  mar- 
ket value  of  the  timber  as  of  March  1,  1913. 

Art.  230,  Reg.  45. 

28 


Charges  to  Capital  and  to  Expense  in  the  Case  of  Timber. — In  the 

case  of  timber  operations  all  expenditures  for  plant,  equipment,  de- 
velopment, rent  and  royalty  prior  to  production,  and  thereafter  all  major 
items  of  plant  and  equipment,  shall  be  charged  to  capital  account  for  pur- 
poses of  depreciation.  After  a  timber  operation  and  plant  has  been  de- 
veloped and  equipped  to  its  normal  and  regular  output  capacity,  the  cost 
of  additional  minor  items  of  equipment  and  the  cost  of  replacement  of 
minor  items  of  worn-out  and  discarded  plant  and  equipment  may  be 
charged  to  current  expenses  of  operations. 

Art.  231,  Reg.  45. 


Depreciation  of  Improvements  in  the  Case  of  Timber. — The  cost  or 
value  as  of  March  1,  1913,  as  the  case  may  be,  of  development  not 
represented,  by  physical  property  having  an  inventory  value,  and  such  cost 
or  value  of  all  physical  property  which  has  not  been  deducted  and 
allowed  as  expense  in  the  returns  of  the  taxpayer,  shall  be  recoverable 
through  depreciation.  It  shall  be  optional  with  the  taxpayer,  subject  to  the 
approval  of  the  Commissioner,  (a)  whether  the  cost  or  value,  as  the  case 
may  be,  of  the  property  subject  to  depreciation  shall  be  recovered  at  a 
rate  established  by  current  exhaustion  of  stumpage,  or  (b)  whether  the 
cost  or  value  shall  be  recovered  by  appropriate  charges  for  depreciation 
calculated  by  the  usual  rules  for  depreciation  or  according  to  the  peculiar 
conditions  of  the  taxpayer's  case  by  a  method  satisfactory  to  the  Com- 
missioner. In  no  case  may  charges  for  depreciation  be  based  on  a  rate 
which  will  extinguish  the  cost  or  value  of  the  property  prior  to  the 
termination  of  its  useful  life.  Nothing  in  these  regulations  shall  be  in- 
terpreted to  mean  that  the  value  of  a  timber  plant  and  equipment,  so  far 
as  it  is  represented  by  physical  property  having  an  inventory  value,  may 
be  reduced  by  depreciation  deductions  to  a  simi  below  the  value  of  the 
salvage  when  the  plant  and  equipment  shall  have  become  obsolete  or  worn 
out  or  shall  have  been  abandoned,  or  that  any  part  of  the  value  of  cut- 
over  land  may  be  recoverable  through  depreciation. 

Art.  232,  Reg.  45. 


Statement  to  be  Attached  to  Return  Where  Depletion  of  Timber 
Claimed. — To  the  return  of  the  taxpayer  claiming  a  deduction  for  deple- 
tion or  depreciation  or  both  there  should  be  attached  a  statement  setting 
out  (a)  whether  the  owner  is  an  owner  in  fee  or  a  lessee  or  both;  (b)  a 
description  of  the  property  owned  in  fee,  if  any,  and  a  description  of  the 
leasehold  property,  if  any,  including  the  date  of  acquisition  and  the  date 
of  expiration  of  the  lease;  (c)  the  cost  of  the  freehold  and  the  leasehold 
property;  (d)  the  number  of  feet  of  timber  removed  and  sold  during  the 
year  for  which  the  return  was  made;  (e)  the  total  amount  deducted  on 
account  of  depletion  and  on  account  of  depreciation,  stated  separately,  up 
to  the  taxable  year  during  the  ownership  of  the  taxpayer;  and  (f)  any 
other  data  which  would  be  helpful  in  determining  the  reasonableness  of  the 
depletion  and  depreciation  deductions  claimed  in  the  return.  The  tax- 
payer shall  keep  accurate  ledger  accounts  as  outlined  in  article  216 
(cost,  market  value  at  March  1,  1913,  value  at  time  of  discovery,  etc.), 
and  in  general  should  comply  with  the  requirements  of  the  regulations 
relating  to  the  depletion  of  mines  and   oil  and  gas  wells  so  far  as 

applicable.  _ 

Art.  233,  Reg.  45. 

29 


NON-RESIDENT  ALIEN. 

Definition  of. 
(New  DefiniUon.) 

Who  is  a  Non-resident  Alien  Individual. — "Non-resident  alien  in- 
dividual" means  an  individual  (a)  whose  residence  is  not  within  the 
United  States,  and  (b)  who  is  not  a  citizen  of  the  United  States.  Any 
alien  living  in  the  United  States  who  is  not  a  mere  transient  is  a  resident 
of  the  United  States  for  purposes  of  the  income  tax.  Whether  he  is  a 
transient  or  not  is  determined  by  his  intentions  with  regard  to  his  stay. 
The  best  evidence  of  such  intentions  is  afforded  by  the  conduct,  acts,  and 
declarations  of  the  alien.  The  typical  transient  is  one  who  stops  for  a 
short  time  in  the  course  of  a  journey  through  the  United  States,  some- 
times performing  labor,  sometimes  not,  or  one  who  enters  the  United 
States  intending  only  to  stop  long  enough  to  carry  out  some  purpose, 
object,  or  plan  not  involving  an  extended  stay.  A  mere  floating  inten- 
tion, indefinite  as  to  time,  to  return  to  another  country  is  not  sufficient 
to  constitute  him  a  transient. 

Art.  311,  Reg.  45. 

Proof  of  Residence  of  Alien. — An  alien's  statements  as  to  his  in- 
tention with  regard  to  residence  are  not  conclusive,  but  when  un- 
equivocal will  determine  the  question  of  his  intention,  unless  his  con- 
duct, acts,  or  other  surroundng  circumstances  contradict  the  statements. 
It  sometimes  occurs  that  an  alien  who  genuinely  intends  his  stay  to  be 
transient  may  put  off  his  departure  from  time  to  time  by  reason  of 
changed  conditions,  remaining  a  transient  though  living  in  the  United 
States  for  a  considerable  time.  The  fact  that  an  alien's  family  is  abroad 
does  not  necessarily  indicate  that  he  is  a  transient  rather  than  a  resident. 
An  alien  who  enters  this  country  intending  to  make  his  home  in  a  foreign 
country  as  soon  as  he  has  accumulated  a  sum  of  money  sufficient  to 
provide  for  his  journey  abroad  is  to  be  considered  a  transient,  provided 
his  expectation  in  this  regard  may  reasonably,  considering  the  rat«  of 
his  saving,  be  fulfilled  within  a  comparatively  short  time. 

Art.  312,  Reg.  45. 

Loss  of  Residence  by  Alien. — It  will  be  presumed  that  an  alien 
who  has  established  a  residence  in  the  United  States,  as  outlined 
above,  continues  to  be  a  resident  until  he  or  his  family  evidence  an  inten- 
tion to  change  their  residence  to  another  country  by  starting  to  remove. 
Thus,  alien  residents  who,  following  the  armistice  agreement  of  Novem- 
ber, 1918,  take  steps  toward  returning  to  their  native  countries,  as  by 
applying  for  passports,  are  to  be  regarded  as  residents  for  that  portion 
of  the  taxable  year  which  elapsed  up  to  the  time  such  step  was  taken. 

Art.  313,  Reg.  45. 

Duty    of    Employer    to    Determine    Status    of    Alien    Employees. — 

Aliens  employed  in  the  United  States  are  prima  facie  regarded  as 
nonresidents.  If  wages  are  paid  without  withholding  the  tax  (see  articles 
361-372),  the  employer  should  be  provided  with  written  proof  of  facts 
which  overcome  the  presumption  that  such  alien  is  a  nonresident.  Such 
facts  include  the  following:  (a)  If  an  alien  has  been  living  in  the  United 
States  for  as  much  as  one  year  immediately  prior  to  the  time  he  entered 
the  employment  of  the  withholding  agent,  or  if  he  has  been  regularly 
employed  by  a  resident  (individual  or  corporation)  in  the  same  coimty 
for  as  much  aa  three  months  immediately  prior,  he  may  be  treated  as  a 
resident  in  the  absence  of  facts  known  to  the  employer  showing  that  he 
is  in  fact  a  transient,  such  as  one  of  the  types  mentioned  under  article 

80 


311.  The  facts  with  regard  to  the  length  of  time  the  alien  has  thus  lived 
in  the  country  or  county  and  has  been  so  regularly  employed  may  be 
established  by  the  certificate  of  the  alien,  (b)  The  employer  may  also 
obtain  evidence  to  overcome  the  prima  facie  presumption  of  nonresidence  by 
securing  from  the  alien  form  1078  (revised),  properly  executed,  or  an 
equivalent  certificate  of  the  alien  establishing  residence.  Having  secured 
such  evidence  from  the  alien,  the  employer  may  rely  thereon  unless  the 
statement  of  the  alien  was  false  and  the  employer  has  reasonable  eause 
to  believe  it  false,  and  may  continue  to  rely  thereon  until  the  alien  ceases 
to  be  a  resident  under  the  provisions  of  article  313  (see  above).  An 
employer  who  seeks  to  account  for  failure  to  withhold  in  the  past, 
if  he  did  not  secure  form  1078  (revised)  or  its  equivalent  at  the  time, 
is  permitted  to  prove  the  former  status  of  the  alien  by  any  material 

evidence. 

Art.  314,  Reg.  45. 

FERSONAI^  SERVICE  CORPORATIONS. 

Followingr  (Arts.  324  to  333)  are  new  reg'ulations  relatinif  to  "Personal 
Service  Corporations." 

Personal  Service  Corporations. — Personal  service  corporations 
are  defined  in  section  200  of  the  statute  ("Standard  Manual,  1919," 
page  52,  line  45).  See  articles  1523-1532.  Such  corporations  are  not 
subject  to  taxation  under  the  statute  as  corporations,  unless  they 
make  returns  for  fiscal  years  beginning  in  1917,  but  are  required  to 
make  returns  of  income.  See  sections  205,  231,  239,  304  and  335  of 
the  statute  and  the  articles  thereunder;  "Standard  Manual,  1919,"  para- 
graphs *246,  522,  501,  711,  792  and  915,  respectively.  The  Individual 
stockholders  of  personal  service  corporations  are,  however,  taxable  upon 
their  distributive  shares  of  the  net  income  of  such  corporations  in 
the  same  manner  as  the  members  of  partnerships.  They  are  also 
taxable  upon  certain  other  amounts  actually  distributed.  See  sections 
201  (Dividends,  "Standard  Manual,  1919,"  Law,  page  53,  line  11)  and 
213  (Gross  Income  Defined,  "Standard  Manual,  1919,"  law,  page  60, 
line  10)  of  the  statute.  Section  303  of  the  statute  contains  provisions 
for  the  taxation  of  a  corporation  a  part  of  the  net  income  of  which 
"(constituting  not  less  than  30  per  centum  of  its  total  net  income)  is 
derived  from  a  separate  trade  or  business  (or  a  distinctly  separate 
branch  of  the  trade  or  business),  which,  if  constituting  the  sole  trade 
or  business,  would  bring  it  within  the  class  of  'personal  service  cor- 
porations.' " 

Art.  324,  Reg.  45. 

Personal  Service  Corporation  Making  Return  on  Calendar  Year 
Basis. — Personal  service  corporations  making  returns  on  the  calendar 
year  basis  are  not  subject  to  taxation  as  corporations  under  the  statute, 
The  individual  stockholders  are,  however,  subject  to  taxation  (a)  upon 
their  distributive  shares  of  the  net  income  of  the  corporation  for  its  tax- 
able year  whether  distributed  or  not,  and  (b)  upon  the  earnings  or  profits 
of  the  corporation  accumulated  since  February  28,  1913,  and  prior  to 
January  1,  1918,  distributed  during  such  taxable  year.  See  section  201 
of  the  statute  and  articles  1541  and  1542 ;  all  relating  to  dividends 
and  other  distributions  by  corporations.  The  net  income  of  a  personal 
service  corporation  shall  be  computed,  as  in  the  case  of  a  partnership,  in 
the  ^me  manner  and  on  the  same  basis  as  is  provided  in  section  212 
(definition  of  net  income)  of  the  statute  for  the  computation  of  the 
net  income  of  an  individual,  except  that  the  deduction  of  certain  kinds 
of  contributions  or  gifts  allowed  individuals  shall  not  be  permitted. 

31 


See  sections  212,  213,  214  and  215  of  the  statute  and  the  articles 
thereunder.  These  sections  of  law  relate  to  gross  and  net  income 
and  deductions  therefrom.  See  "Standard  Manual,  1919,"  pages  59  to 
65. 

Art.  325,  Reg.  45. 

Taxation  of  Stockholders  of  Personal  Service  Corporation  With 
Calendar  Year. — A  stockholder  of  a  personal  service  corporation  at 
the  close  of  the  calendar  year  1918,  and  any  subsequent  calendar  year,  is 
required  to  account  for  and  is  taxable  upon  his  proportionate  share  of  the 
net  income  of  the  corporation  for  such  taxable  year  which  remains  undis- 
tributed at  that  time.  A  stockholder  who  receives  any  amount  in  distribu- 
tion of  the  net  income  of  the  corporation  accumulated  since  December  31, 
1917,  which  has  not  been  accounted  for  by  a  stockholder  as  undistributed 
income,  is  required  to  account  therefor  and  is  taxable  thereon.  A  stock- 
holder who  receives  any  amount  in  distribution  of  earnings  or  profits  of 
the  corporation  accumulated  since  February  28,  1913,  and  prior  to  January 
1,  19i^,  is  required  to  account  therefor  and  is  taxable  thereon;  but  he  is 
not  required  to  account  for  any  earnings  or  profits  accumulated  prior  to 
March  1,  1913.  See  section  201  of  the  statute  and  articles  1541  and  1542 
on  the  subject  of  dividends. 

Art.  326,  Reg.  45. 

Personal  Service  Corporation  Making  Return  for  Fiscal  Year  Begin- 
ning in  1917  and  Enging  in  1918. — If  the  fiscal  year  of  a  personal 
service  corporation  began  in  the  calendar  year  1917  and  ended  in  the  cal- 
endar year  1918,  it  is,  as  a  corporation,  subject  to  income  and  exceSS  profits 
taxes  for  the  part  of  such  fiscal  year  which  falls  within  the  calendar  year 
1917.  The  amounts  for  which  such  a  corporation  is  liable  are  such  pro- 
portions respectively  of  the  income  taxes  for  the  entire  fiscal  year,  com- 
puted in  accordance  with  Title  I  of  the  Revenue  Act  of  1916  as  amended 
hj  the  Revenue  Act  of  1917  and  with  Title  I  of  the  Revenue  Act  of  1917, 
and  of  the  excess  profits  taxes  computed  in  accordance  with  Title  II  of 
the  Revenue  Act  of  1917  for  the  entire  fiscal  year,  as  the  portion  of  such 
fiscal  year  falling  within  the  calendar  year  1917  is  of  the  entire  period. 
See  sections  205  and  335  of  the  statute  and  article  1621,  relative  to 
fiscal  years.  Amounts  previously  paid  by  the  corporation  on  account 
of  income  taxes  for  such  fiscal  year  shall  be  credited  toward  the  pay- 
ment of  the  income  taxes  for  the  portion  of  the  fiscal  year  falling 
within  the  calendar  year  1917.  Any  excess  shall  be  credited  or  re- 
funded in  accordance  with  the  provisions  of  section  252  (Refunds)  of 
the  statute.  Amounts  previously  paid  by  the  corporation  on  account 
of  excess  profits  taxes  for  any  period  beginning  on  or  after  January 
1,  1918,  shall  be  immediately  refunded  as  a  tax  erroneously  or  illegally 
collected.  See  section  335  of  the  statute  and  article  1034;  also  see 
"Standard  Manual,  1919,"  paragraph  2906. 

Art.  327,  Reg.  45. 

Taxation  of  Stockholders  of  Personal  Service  Corporation  with  Fiscal 
Year  Ending  in  1918. — An  individual  stockholder  of  a  personal  serv- 
ice corporation  with  a  fiscal  year  ending  in  1918  is,  moreover,  subject  to 
taxation  (a)  upon  his  distributive  share  of  the  net  income  of  the  corpora- 
tion for  its  fiscal  year  whether  distributed  or  not,  and  (b)  upon  the  earn- 
ings or  profits  of  the  corporation  accumulated  since  February  28,  1913,  and 
prior  to  the  beginning  of  such  fiscal  year,  distributed  during  such  fiscal 
year.  See  section  201  of  the  statute  and  articles  1541  and  1542.  Such 
part  of  a  stockholder's  distributive  share  of  the  net  income  of  a  corpora- 
tion for  its  fiscal  year  as  is  attributable  to  the  calendar  year  1918  is  tax- 

32 


able  at  the  rates  for  such  calendar  year,  and  such  part  of  such  distribu- 
tive share  aa  is  attributable  to  the  calendar  year  1917  is  taxable  at  the 
rates  for  such  calendar  year,  but  is  not  subject  to  normal  tax.  See  sec- 
tion 205  (fiscal  years)  of  the  statute.  The  part  of  a  stockholder's 
distributive  share  of  the  net  income  of  a  corporation  for  its  fiscal  year 
attributable  to  the  calendar  year  1918  is  found  by  determining  his 
distributive  share  of  the  net  income  of  the  corporation  for  its  fiscal 
year,  whether  distributed  or  not,  in  the  same  manner  as  if  the  fiscal 
year  were  the  calendar  year  1918,  and  then  taking  the  proportion 
thereof  which  the  part  of  such  fiscal  year  falling  within  such  calendar 
year  bears  to  the  full  fiscal  year.  The  part  of  a  stockholder's  distribu- 
tive share  of  the  net  income  of  a  corporation  for  its  fiscal  year  attribu- 
table to  the  calendar  year  1917  is  found  by  determining  the  net 
income  of  the  corporation  for  its  fiscal  year  in  accordance  with  tlje 
law  applicable  to  the  calendar  year  1917  and  determining  the  stock- 
holder's distributive  share  thereof  by  adding  to  the  amounts  of  such  net 
income  distributed  to  him  during  such  fiscal  year  his  proportion  of  the 
net  income  of  such  fiscal  year  remaining  undistributed  at  the  close  thereof, 
and  then  taking  the  proportion  of  such  distributive  share  which  the  part 
of  such  fiscal  year  falling  within  the  calendar  year  1917  bears  to  the 
full  fiscal  year. 

Art.  328,  Reg.  45. 


Applicable  of  Different  Tax  Rates  in  the  Case  of  Fiscal  Year 
Enging  in  1918. — ^Any  deductions,  exemptions,  or  credits  to  which 
the  stockholder  of  a  personal  service  corporation  with  a  fiscal  year  ending 
in  1918  is  entitled  shall  first  be  applied  against  his  income  subject  to  the 
rates  for  the  calendar  year  1918,  unless  of  a  kind  plainly  and  properly 
chargeable  against  income  taxable  at  the  rates  for  the  calendar  year  1917. 
See  section  206  (parts  of  income  subject  to  rates  for  different 
years)  of  the  statute  and  article  1641.  The  proportionate 
share  of  a  stockholder  of  any  excess  profits  tax  imposed  upon  the  cor- 
poration under  the  Revenue  Act  of  1917,  with  respect  to  that  part  of  the 
fiscal  year  falling  within  the  calendar  year  1917,  is  plainly  and  properly 
chargeable  against  income  taxable  at  the  rates  for  that  year  and  shall  be 
credited  against  such  income  of  the  stockholder.  In  determining  the 
rates  of  tax  applicable  to  the  amounts  of  the  distributive  shares  of  the 
stockholders  attributable  to  the  calendar  years  1917  and  1918,  respec- 
tively, the  amounts  subject  to  the  rates  for  the  calendar  year  shall  be 
placed  in  the  lower  brackets  of  the  rate  schedule  provided  in  the  present 
statute,  and  the  amounts  attributable  to  the  calendar  year  1917  in  the 
next  higher  brackets  of  the  rate  schedule  applicable  to  that  year. 
See  section  1  of  Title  I  of  the  Revenue  Act  of  1916,  and  sections  1  and 
2  of  Title  I  of  the  Revenue  Act  of  1917  (Income  law). 

Art.  329,  Reg.  45. 


Personal  Service  Corporation  Making  Returns  for  Fiscal  Year  End- 
ing in  1919  or  Later. — If  the  fiscal  year  of  a  personal  service  corpora- 
tion began  in  the  calendar  year  1918  or  later  and  ends  in  the  calendar 
year  1919  or  later,  it  is  not  subject  to  taxation  as  a  corporation  under  the 
statute.  An  individual  stockholder  is,  however,  subject  to  taxation  (a) 
upon  his  distributive  share  of  the  net  income  of  the  corporation  for  its 
fiscal  year  whether  distributed  or  not,  and  (b)  upon  the  earnings  or 
profits  of  the  corporation  accumulated  since  February  28,  1913,  and  prior 
to  January  1,  1918,  distributed  during  such  fiscal  year.  See  section  201 
(Dividends)  of  the  statute  and  articles  1541  and  1542. 

Art.  330,  Reg.  45. 

33 


Taxation  of  Stockholders  of  Personal  Service  Corporation  with 
Fiscal  Year  Ending  in  1919.— Such  part  of  a  stockholder's  distributive 
share  of  the  net  income  of  a  personal  service  corporation  for  its  fiscal  year 
ending  in  1919  as  is  attributable  to  the  calendar  year  1919  is  taxable  at 
the  rates  for  such  calendar  year,  and  such  part  of  such  distributive  share 
as  is  attributable  to  the  calendar  year  1918  is  taxable  at  the  rates  for 
such  calendar  year.  See  section  205  (fiscal  years)  of  the  statute  and 
article  1621.  The  part  of  a  stockholder's  distributive  share  of  the  net 
income  of  a  corporation  for  its  fiscal  year  attributable  to  the  calendar 
year  1919  is  found  by  determining  his  distributive  share  of  the  net 
income  of  the  corporation  for  its  fiscal  year,  whether  distributed  or 
not,  in  the  same  manner  as  if  the  fiscal  year  were  the  calendar  year 
1919,  and  then  taking  the  proportion  thereof  which  the  part  of  such 
fiscal  year  falling  within  such  calendar  year  bears  to  the  full  fiscal 
year.  The  part  of  a  stockholder's  distributive  share  of  the  net  in- 
come of  a  corporation  for  its  fiscal  year  attributable  to  the  calendar 
year  1918  is  found  by  determining  his  distributive  share  of  the  net 
income  of  the  corporation  for  its  fiscal  year,  whether  distributed 
or  not,  in  the  same  manner  as  if  the  fiscal  year  were  the  calendar  year 
1918,  and  then  taking  the  proportion  thereof  which  the  part  of  such  fiscal 
year  falling  within  such  calendar  year  bears  to  the  full  fiscal  year. 

Art.  331,  Reg.  45. 

Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal  Year 
Ending  in  1919. — Any  deductions,  exemptions,  or  credits  to  which 
the  stockholder  of  a  personal  service  corporation  with  a  fiscal  year  ending 
in  1919  is  entitled  shall  first  be  applied  against  his  income  subject  to  the 
rates  for  the  calendar  year  1919,  unless  of  a  kind  plainly  and  properly 
chargeable  against  income  taxable  at  the  rates  for  the  calendar  year  1918. 
See  section  206  (parts  of  income  subejct  to  rates  for  different  years) 
of  the  statute  and  article  1641.  In  determining  the  rates  of  tax 
applicable  to  the  amounts  of  the  distributive  shares  of  the  stock- 
holders attributable  to  the  calendar  years  1918  and  1919,  respectively,  the 
amounts  subject  to  the  rates  for  the  calendar  year  1919  shall  be  placed 
in  the  lower  brackets  of  the  rate  schedule  provided  in  the  statute  and  the 
amounts  attributable  to  the  calendar  year  1918  in  the  next  higher 
brackets  of  the  rate  schedule  applicable  to  that  year. 

Art.  332,  Reg.  45. 

Credits  Allowed  Stockholders  of  Personal  Service  Corporation. — A 

stockholder  of  a  personal  service  corporation  is  entitled  to  credit,  for 
the  purpose  of  the  normal  tax  only,  for  amounts  received  in  distribution 
of  earnings  or  profits  of  the  corporation  accumulated  since  February  28, 
1913,  and  prior  to  January  1,  1918,  or,  in  the  case  of  a  personal  service 
corporation  with  a  fiscal  year  ending  in  1918,  prior  to  the  beginning  of  the 
fiscal  year.  See  sections  201  (Dividends)  and  216  (Credits)  of  the 
statute  and  articles  1541  and  301.  In  addition  to  the  credits  ordi- 
narily allowed  to  an  individual,  a  stockholder  of  a  personal  service 
corporation  is  entitled  to  the  following  credits:  (a)  a  credit  against 
net  income  for  the  purpose  of  the  normal  tax  only  of  his  propor- 
tionate share  of  such  dividends  from  a  corporation  subject  to  tax  and 
of  such  interest  not  entirely  exempt  from  tax  upon  obligations  of  the 
United  States  and  bonds  of  the  War  Finance  Corporation  as  are  re- 
ceived by  the  personal  service  corporation,  and  (b)  a  credit  against  income 
tax  of  the  stockholder's  proportionate  share  of  income,  war  profits,  and 
excess  profits  taxes  of  the  personal  service  corporation  paid  or  accrued 
during  the  taxable  year  to  a  foreign  country  upon  income  derived  from 
sources  therein,  or  to  any  possession  of  the  United  States,  subject  to  the 
limitations  of  section  222  (Credit  for  Taxes)  of  the  statute.  See 
articles  381-384,  relating  to  credit  for  taxes. 

Art.  333,  Reg.  45. 

34 


CORPORATION  PROFITS. 

When  Taxable  to  Stockholders. 

Profits  of  corporations  Taxable  to  Stockholders.— Where  a  domestic 
or  foreign  corporation  permits  its  gains  and  profits  to  accumulate 
for  the  purpose  of  preventing  the  imposition  of  the  surtax  upon  such 
income  if  distributed  to  its  stockholders,  it  shall  not  be  subject  to 
the  income  tax  as  a  corporation,  but  its  stockholders  shall  be  subject  to 
tax  in  the  same  way  as  the  stockholders  of  a  personal  service  corporation, 
except  that  the  war  profits  and  excess  profits  tax  on  the  corporation  shall 
first  be  deducted  from  its  net  income  before  computing  the  proportionate 
shares  of  the  stockholders.  See  section  218  (Partnerships  and  Personal 
Service  Corporations)  of  the  statute  and  articles  324-333.  In  any  case 
the  Commissioner  or  a  collector  may  require  a  corporation  to  furnish 
a  statement  of  its  gains  and  profits  and  of  the  names,  addresses, 
and  shareholdings  of  the  stockholders,  and  if  upon  the  basis  of  such 
statement  or  other  evidence  the  Commissioner  certifies  that  in  his 
opinion  its  accumulation  of  profits  is  unreasonable  for  the  purposes 
of  the  business  the  corporation  and  its  stockholders  shall  make  their 
returns  accordingly. 

Art.  351,  Reg.  45. 

WITHHOLDING  AT  THE  SOURCE. 

Non-Resident  Aliens. 
(Standard  Manual  1919,  p.  69,  line  48.) 

Agent  of — Responsibility  of. 

In  the  case  of  tax-free  bonds,  the  coupons  of  vs^hich  are  paid  without 
deduction  of  the  2%  tax  required  by  law  to  be  withheld  and  paid  by  the 
issuing  corporation,  the  agent  for  a  non-resident  alien  is  not  required 
to  withhold  and  pay  the  full  normal  tax  of  8%  on  such  interest.  The 
proper  procedure  is  to  make  a  return  in  behalf  of  such  non-resident  alien 
individual  (on  Form  1040,  revised)  and  to  take  credit  on  such  return 
for  the  2%  tax  withheld. 

Withholding  in  1918. — In  cases  prior  to  the  date  of  the  passage 
of  the  Revenue  Act  of  1918,  where  a  withholding  agent  pursuant 
to  the  Revenue  Acts  of  1916  and  1917  withheld  only  2  per  cent  from 
the  income  of  nonresident  alien  individuals,  he  need  return  only  such  sura. 
In  all  such  cases  where  a  withholding  agent  withheld  the  tax  pursuant  to 
the  Revenue  Acts  of  1916  and  1917  from  the  income  of  foreign  corpora- 
tions not  engaged  in  trade  or  business  within  the  United  States  and  not 
having  any  office  or  place  of  business  therein,  he  need  return  only  the 
sum  withheld,  to  an  amount  not  in  excess  of  the  aggregate  sum  required 
to  be  withheld  by  the  terms  of  the  Revenue  Act  of  1918  from  the  income 
paid  over  by  the  withholding  agent. 

Art.  368,  Reg.  45. 

Release  of  Excess  Tax  Withheld.  —  Any  sum  withheld  for  tax 
since  December  31,  1917,  in  excess  of  the  amount  prescribed  by  the 
Revenue  Act  of  1918,  shall  be  released  by  the  withholding  agent  and  paid 
over  to  the  person  from  whom  it  was  withheld  or  his  proper  representa- 
tive. With  reference  to  how  a  debtor  corporation  may  release  and  pay 
over  the  amoun+  of  tax  so  withheld  in  a  case  where  a  bank  or  oth<^r  col- 
lection agency  detached  the  ownership  certificate  which  accompanied  an 
interest  coupon  and  substituted  its  own  certificate    (form     1059),  which 

35 


does  not  disclose  the  name  and  address  of  the  bond  owner,  in  such  cases 
the  withholding  agent  shall  request  the  bank  or  collection  agency  to  dis- 
close the  name  and  address  of  the  owner  of  the  bonds,  as  shown  by  the 
original  certificate,  and  it  shall  be  the  duty  of  the  bank  or  collection 
agency  to  make  such  disclosure  to  the  withholding  agent.  Where  with- 
holding agents  have  so  released  any  excess  of  tax,  an  itemized  statement 
showing  the  names,  addresses  and  amounts  refunded  should  be  attached 
to  the  annual  list  returns  (form  1013),  in  order  to  reconcile  any  dis- 
crepancy between  the  aggregate  amount  of  taxes  returned  as  shown  by  the 
monthly  list  returns  (form  1012)  and  the  aggregate  amount  as  shown  by 
the  annual  list  return. 

Art.  369,  Reg.  45. 

GAIN  OR  LOSS. 
Basis  for  Determining. 

Basis  for  Determining  Gain  or  Loss  from  Sale  or  Exchange  of 
Proerty. — For  the  purpose  of  ascertaining  the  gain  or  loss  from  the  sale 
or  exchange  of  property  the  basis  is  (a)  its  fair  market  price  or 
value  as  of  March  1,  1913,  if  acquired  prior  thereto,  or  (b),  if  acquired 
on  or  after  that  date,  its  cost  or  its  approved  inventory  value.  What 
the  fair  market  price  or  value  of  property  was  on  March  1,  1913,  is  a 
question  of  fact  to  be  established  by  any  evidence  which  will  reasonably 
and  adequately  make  it  appear.  See  also  section  203  (Inventories)  of 
the  statute  and  articles  1581-1585. 

Art.  1561,  Reg.  45. 

Exchanges  of  Property. — Gain  or  loss  arising  from  the  acquisition 
and  subsequent  disposition  of  property  is  realized  when  as  the  result 
of  a  transaction  between  the  owner  and  another  person  the  prop- 
erty is  converted  into  cash  or  into  property  (a)  that  is  essentially  dif- 
ferent from  the  property  disposed  of  and  (b)  that  has  a  market  value. 
In  other  words,  both  (a)  a  change  in  substance  and  not  merely  in  form, 
Knd  (b)  a  change  into  the  equivalent  of  cash,  are  required  to  complete 
or  close  a  transaction  from  which  income  may  be  realized.  By  way  of 
illustration,  if  a  man  owning  ten  shares  of  listed  stock  exchanges  his 
stock  certificate  for  a  voting  trust  certificate,  no  income  is  realized,  because 
the  conversion  is  merely  in  form;  or  if  he  exchanges  his  stock  for  stock 
in  a  small,  closely  held  corporation,  no  income  is  realized  if  the  new  stock 
has  no  market  value,  although  the  conversion  is  more  than  formal;  but 
if  he  exchanges  his  stock  for  a  liberty  bond,  income  may  be  realized, 
because  the  conversion  is  into  independent  property  having  a  market 
value.  The  exchange  oi  a  so-called  convertible  bond  for  stock  pursuant 
to  such  a  privilege  grant ea  in  the  bond  will  produce  income  if  the  stock 
Toceived  in  exchange  has  a  fair  market  value  in  excess  of  the  cost  or 
fair  market  value  as  of  March  1,  1913,  of  the  bond. 

Art.  1563,  Reg.  45. 

Determination  of  Gain  or  Loss  from  Exchange  of  Property. — The 

amount  of  income  derived  in  the  case  of  an  exchange  of  property, 
as  of  stock  for  a  bond,  is  the  excess  of  the  fair  market  value  at  the 
time  of  exchange  of  the  bond  received  in  exchange  over  the  original  cost 
of  the  stock  exchanged  for  it,  or  over  the  fair  market  price  or  value  of 
such  stock  as  of  March  1,  1913,  if  acquired  before  that  date.  The  amount 
of  income  derived  from  a  subsequent  sale  of  the  bond  for  cash  is  the 
excess. s3f  the  amount  so  received  over  the  fair  market  value  of  such 
bond  when  acquired  in  exchange  for  the  stock.  On  the  other  hand,  if 
the  property  received  in  exchange  is  substantially  the  same  property  or 

36 


has  no  market  value,  then  no  gain  or  loss  is  realized,  but  the  new  property 
is  to  be  regarded  as  substituted  for  the  old  and  upon  a  sale  of  the  new 
property  the  amount  of  income  derived  is  the  excess  of  the  amount  so 
received  over  the  cost  or  fair  market  value  as  of  March  1,  1913,  of  the 
old.  But  see  article  1566,  relative  to  gain  or  loss  from  stock  exchanged 
for  other  stock. 

Art.  1564,  Reg.  45. 

Exchange  for  Different  Kinds  of  Property. —  (a)  If  property  is  ex- 
changed for  two  different  kinds  of  property,  such  as  bonds  and  stock, 
the  bonds  having  a  market  value  and  the  stock  none,  the  value  of  the 
bonds  is  to  be  compared  with  the  cost  or  fair  market  value  as  of  March 
1,  1913,  of  the  original  property,  as  the  case  may  be.  If  the  market 
value  of  the  bonds  is  less  than  such  cost  or  value,  the  difference  represents 
the  cost  of  the  stock.  If  the  market  value  of  the  bonds  is  greater  than 
such  cost  or  value,  the  difference  is  taxable  income  at  the  time  of  the 
exchange  and  whenever  sold  the  entire  proceeds  of  the  stock  will  be 
taxable,  (b)  If  property  is  exchanged  for  two  different  kinds  of  property, 
such  as  bonds  and  stock,  neither  having  a  market  value,  the  cost  or 
fair  market  value  as  of  March  1,  1913,  of  the  original  property  should 
be  apportioned,  if  possible,  between  the  bonds  and  stock  for  the  purpose  of 
determining  gain  or  loss  on  subsequent  sales.  If  no  fair  apportionment 
is  practicable,  no  profit  on  any  subsequent  sale  of  any  part  of  the  bonds 
or  stock  is  realized  until  out  of  the  proceeds  of  sales  shall  have  been 
recovered  the  entire  cost  or  fair  market  value  as  of  March  1,  1913,  of  the 
original  property. 

Art.  1565,  Reg.  45. 

Exchange  of  Stock  for  Other  Stock  of  No  Greater  Par  Value. — In 

general,  where  two  corporations  unite  their  properties  by  either  (a) 
the  dissolution  of  corporation  B  and  the  sale  of  its  assets  to  corporation 
A,  or  (b)  the  sale  of  its  property  by  B  to  A  and  the  dissolution  of  B,  or 
(c)  the  sale  of  the  stock  of  B  to  A  and  the  dissolution  of  B,  or  (d)  the 
merger  of  B  into  A,  or  (e)  the  consolidation  of  the  corporations,  no 
taxable  income  is  received  from  the  transaction  J)y  A  or  B  or  the  stock- 
holders of  either,  provided  the  sole  consideration  received  by  B  and  its 
stockholders  in  (a),  (b),  (c)  and  (d)  is  stock  or  securities  of  A,  and  by 
A  and  B  and  their  stockholders  in  (e)  is  stock  or  securities  of  the  con- 
solidated corporation,  in  any  case  of  no  greater  aggregate  par  or  face 
value  than  the  old  stock  and  securities  surrendered.  For  the  purpose  of 
ascertaining  the  gain  derived  or  loss  sustained  from  the  subsequent  sale 
of  any  stock  of  A  or  of  the  consolidated  corporation  so  received,  the 
original  cost  to  the  taxpayer  or  the  fair  market  price  or  value  as  of 
March  1,  1913,  of  the  stock  of  B  or  A  in  respect  of  which  the  new  stock 
was  issued,  less  any  untaxed  distribution  made  to  the  taxpayer  by  A 
out  of  the  former  capital  or  surplus  of  B,  or  by  the  consolidated  corporation 
out  of  the  former  capital  or  surplus  of  A  or  B,  is  the  basis  for  determining 
the  amount  of  such  gain  or  loss. 

Art.  1566,  Reg.  45. 

Exchange  of  Stock  for  Other  Stock  of  Greater  Par  Value.— If  in 

the  case  of  any  reorganization,  merger  or  consolidation  the  aggregate 
par  or  face  value  of  the  new  stock  or  securities  received  is  in  excess  of 
the  aggregate  par  or  face  value  of  the  stock  and  securities  exchanged, 
income  will  be  realized  from  the  transaction  by  the  recipients  of  the  new 
stock  or  securities  to  an  amount  limited  by  (a)  the  excess  of  the  par 
or  face  value  of  the  new  stock  or  securities  over  the  par  or  face  value 
of  the  old  and  (b)  the  excess  of  the  fair  market  value  of  the  new  stock 
or  securities  over  the  cost  or  fair  market  value  as  of  March  1,  1913,  of  the 

37 


old.  In  other  words,  the  taxable  profit  will  be  (a)  or  (b),  whichever  is 
less.  Upon  a  subsequent  sale  of  the  new  stock  or  securities  their  costs  to 
the  taxpayer  will  be  the  cost  or  fair  market  value  as  of  March  1,  1913, 
of  the  old  stock  and  securities,  plus  the  profit  taxed  on  the  exchange. 

Art.  1567,  Reg.  45. 

INVENTORIES. 

Need  of  Inventories. — In  order  to  reflect  the  net  income  correctly, 
inventories  at  the  beginning  and  ending  of  each  year  are  neces- 
sary in  every  case  in  which  the  production,  purchase  or  sale  of  merchan- 
dise is  an  income-producing  factor.  The  inventory  should  include  raw 
materials  and  supplies  on  hand  that  have  been  acquired  for  sale,  con- 
sumption or  use  in  productive  processes,  together  with  all  finished  or 
partly  finished  goods.  Title  to  the  merchandise  included  in  the  inventory 
should  be  vested  in  the  taxpayer  and  goods  merely  ordered  for  future 
delivery  and  for  which  no  transfer  of  title  has  been  effected  should  be 
excluded.  The  inventory  should  include  merchandise  sold  but  not  shipped 
to  the  customer  at  the  date  of  the  inventory,  together  with  any  mer- 
chandise out  upon  consignment.  It  should  also  include  merchandise  pur- 
chased, although  not  actually  received,  to  which  title  has  passed  to  the 
purchaser.  In  this  regard  care  should  be  exercised  to  take  into  the 
accounts  all  invoices  or  other  charges  in  respect  of  merchandise  properly 
included  in  the  inventory,  but  which  is  in  transit  or  for  other  reasons 
has  not  been  reduced  to  physical  possession. 

Art.  1581,  Reg.  45. 

Valuation  of  Inventories. — Inventories  should  be  valued  at  (a) 
cost  or  (b)  cost  or  market,  whichever  is  lower.  Whichever  basis  was 
adopted  by  a  taxpayer  in  respect  of  the  taxable  year  1917  must  be 
continued  unless  upon  application  to  the  Commissioner  permission  is 
granted  to  change.  If  basis  (b)  is  used  it  must  be  applied  to  each  item 
in  the  inventory  and  not  to  a  part  only.  Inventories  should  be  recorded 
in  a  legible  manner  and  properly  computed  and  summarized  and  should 
be  preserved  as  a  part  .of  the  accounting  records  of  the  taxpayer. 

Art.  1582,  Reg.  45. 

Inventories  at  Cost. — Cost  means: 

(1)  In  the  case  of  merchandise  purchased,  the  invoice  price  less  trade 
or  other  discounts  except  strictly  cash  discounts  approximating  a  fair 
interest  rate,  which  may  be  deducted  or  not  at  the  option  of  the  tax- 
payer provided  a  consistent  course  is  followed.  To  this  net  invoice  price 
should  be  added  transportation  or  other  necessary  charges  incurred  in 
acquiring  possession  of  the  goods.  Goods  taken  in  the  inventory  which 
have  been  so  intermingled  that  they  can  not  be  identified  with  specific 
invoices  will  be  deemed  to  be  the  goods  most  recently  purchased. 

(2)  In  the  case  of  merchandise  produced  by  the  taxpayer,  (a)  the  cost 
of  raw  materials  and  supplies  entering  into  or  consumed  in  connection 
with  the  product,  (b)  expenditures  for  direct  labor,  (c)  indirect  expenses 
incident  to  and  necessary  for  the  production  of  the  particular  article, 
including  in  such  indirect  expenses  a  reasonable  proportion  of  management 
expenses,  but  not  including  any  cost  of  selling  or  return  on  capital  whether 
by  way  of  interest  or  profit. 

In  any  industry  in  which  the  usual  rules  for  computation  of  cost  of 
production  are  inapplicable,  costs  may  be  approximated  upon  such  basis 
as  may  be  reasonable  and  in  conformity  with  established  trade  practice 
in  the  particular  industry. 

Art.  1583,  Reg.  45. 

38 


Inventories  at  Market. — Market  means  the  current  bid  price  pre- 
vailing at  the  date  of  the  inventory  for  the  particular  merchandise, 
and  is  applicable  to  goods  purchased  and  on  hand  and  to  basic  materials 
in  goods  in  process  of  manufacture  and  in  finished  goods  on  hand,  ex- 
clusive, however,  of  goods  on  hand  or  in  process  of  manufacture  for 
delivery  upon  firm  sales  contracts  at  fixed  prices  entered  into  before 
the  date  of  the  inventory.  Where  no  open  market  quotations  are  avail- 
able the  taxpayer  must  use  such  evidence  of  a  fair  market  price  as 
may  be  available  to  him,  such  as  specific  transactions  in  reasonable 
volume  entered  into  in  good  faith,  or  compensation  paid  for  cancellation 
of  contracts  for  purchase  commitments.  The  burden  of  proof  will  rest 
upon  the  taxpayer  in  each  case  to  satisfy  the  Commissioner  of  the 
correctness  of  the  prices  adopted.  It  is  recognized  that  in  the  latter  part 
of  1918,  by  reason  among  other  things  of  governmental  control  not  having 
been  relinquished,  conditions  were  abnormal  and  in  many  commodities 
tnere  was  no  such  scale  of  trading  as  to  establish  a  free  market.  In 
such  a  case,  when  a  market  has  been  established  during  the  succeeding 
year,  a  claim  may  be  filed  in  accordance  with  the  provisions  of  section 
214  (a)  (12)  of  the  statute  for  a  recomputation  of  the  net  income  of  the 
preceding  taxable  year  and  an  adjustment  of  the  income  and  war  excess 
profits  taxes.  See  article  261  (Income  Tax  in  Porto  Rico  and  Philippine 
Islands). 

Art.  1584,  Reg.  45. 

NET  LOSSES. 

Scope  of  Net  Losses. — As  used  in  the  statute  the  term  "net  loss" 
means  either  a  business  operating  loss  or  a  loss  realized  by  a  bona 
fide  sale  of  property  constructed,  installed  or  acquired  on  or  after  April  6, 
1917,  for  the  production  of  articles  contributing  to  the  prosecution  of  the 
war.  The  amount  of  net  loss  claimed  must  represent  an  actual  net  loss 
over  and  above  all  income,  including  tax-free  income.  Such  losses  will  be 
allowable  only  in  respect  of  a  taxpayer  having  a  taxable  year  beginning 
after  October  31,  1918,  and  ending  prior  to  January  1,  1920,  and  after  one 
claim  has  been  allowed  no  further  claim  can  be  considered. 

Art.  1601,  Reg.  45. 

Claim  for  Allowance  of  Net  Loss. — A  taxpayer  having  such  a  net 
loss  may  file  a  claim  vrith  the  collector  of  the  district  in  which  the 
taxpayer's  return  for  the  preceding  year  was  filed.  Such  claim  should 
state  the  name  and  address  of  the  taxpayer  and  should  contain  a  concise 
statement  of  the  amount  of  the  loss  sustained  and  the  basis  upon  which 
it  has  been  computed,  together  with  all  pertinent  facts  necessary  to  enable 
the  Commissioner  to  determine  the  allowability  of  the  claim.  Each  claim 
should  be  supported  by  an  affidavit. 

Art.  1602,  Reg.  45. 

Allowance  of  Net  Loss. — The  amount  allowed  by  the  Commissioner 
in  respect  of  any  such  claim  shall  be  deducted  from  the  net  income 
for  the  taxable  year  1918,  and  the  taxes  imposed  by  this  title  shall 
be  recomputed  accordingly.  Any  amount  found  to  be  due  him  shall  be 
credited  or  refunded  to  the  taxpayer  in  accordance  with  the  provisions  of 
section  252  (Refunds).  In  any  case  in  which  it  is  found  by  the  Com- 
missioner that  such  net  loss  is  in  excess  of  the  net  income  of  such 
preceding  taxable  year,  the  taxpayer  may  carry  forward  the  amount 
of  such  excess  and  claim  it  as  a  deduction  in  computing  net  income 
for  the  succeeding  taxable  year. 

Art.  1603,  Reg.  45. 

39 


Corporations 


RETURNS 

Returns  of  Foreign  Corporations. — Every  foreign  corporation  liaving 
income  from  sources  within  the  United  States  must  make  a  return 
of  income  on  form  1120.  If  such  a  corporation  has  no  office  or 
place  of  business  here,  but  has  a  resident  agent,  he  shall  make  the 
return.  It  is  not  necessary,  however,  for  it  to  be  required  to  I  make  a 
return  that  the  foreign  corporation  shall  be  engaged  in  business  in  this 
country  or  that  it  have  any  office,) branch  or  agency  in  the  United  States. 
Article  548,  Regulations  45,  defines  income  of  a  foreign  corporation  as 
income  received  from  sources  within  the  United  States. 

Art.  625,  Reg.  45. 

(AmpUficatioji  of  "Standard  Manual  1919,"  TT712,  TI713,  11729,  IT  730) 
Use  of  Prescribed  Forms. — Copies  of  the  prescribed  return  forms 
will  be  furnished  corporations  by  collectors.  Failure  on  the  part  of 
any  corporation  liable  to  tax  to  receive  a  prescribed  blank  form  will 
tiQ^,  however,  excuse  it  from  making  the  return.  Corporations  not  sup- 
plied with  the  proper  forms  should  make  application  therefor  to  the  col- 
lector in  ample  I  time  to  have  their  returns  prepared,  verified  and  filed 
with  the  collector  on  or  before  the  last  due  date.  Each  corporation 
should  carefully  prepare  its  return  so  as  fully  and  clearly  to  set  forth  the 
data  therein  called  )for.  Imperfect  or  incorrect  returns  will  not  be 
accepted  as  meeting  the  requirements  of  the  statute.  In  lack  of  a  pre- 
scribed form  a  statement  made  by  a  corporation  disclosing  its  gross 
income  and  the  deductions  therefrom  }may  be  accepted  as  a  tentative 
return,  and  if  filed  within  the  prescribed  time  a  return  so  made  will 
relieve  the  corporation  from  liability  to  penalties,  provided  that  without 
unnecessary  delay  such  aUentative  return  is  replaced  by  a  return  made 
on  the  proper  form.  Article  442,  Regulations  45,  and  "Standard  Manual, 
1919,"  paragraphs  509  and  510,  relate  to  extension  of  time  for  filing 
returns. 

Art.  626,  Reg.  45. 


CHANGE  IN  OWNERSHIP 

Change  in  Ownership  During  Taxable  Year. — When  one  corporation 
owns  substantially  all  the  stock  of  another  corporation  at  the  be- 
ginning of  any  taxable  year,  but  during  the  taxable  year  sells  all 
or  a  majority  of  such  stock  to  outside  interests  I  not  affiliated  with  it, 
or  when  one  corporation  during  any  taxable  year  acquires  substantially  all 
the  capital  stock  of  another  corporation  with  which  it  was  not) previously 
affiliated,  a  full  disclosure  of  the  circumstances  of  such  changes  in  owner- 
ship shall  be  submitted  to  the  Commissioner.  In  accordance  with  the 
peculiar  circumstances  in  each  case  the  Commissioner  may  require 
separate  or  consolidated  returns  to  be  filed,  to  the  end  that  the  tax  may 

40 


be  equitably  assessed.  Article  631,  Regulations  45,  and  "Standard  Man- 
ual, 1919,"  paragraph  711,  deal  with  the  subject  of  affiliated  corpora- 
tions. 

Art.  634,  Reg.  45. 

AFFILIATED  CORPORATIONS 

(Amplication  of  "Standard  Manual  1919,"  1[711) 

Domestic  Corporation  AfiSliated  With  Foreign  Corporation.— A  do- 
mestic corporation  which  owns  a  majority  of  the  stock  of  a  foreign 
corporation  shall  not  be  permitted  or  required  to  include  the  net 
income  or  invested  capital  of  such  foreign  corporation  in  a  con- 
solidated return,  but  for  the  purpose  of  section  238  of  the  statute 
(Credit  for  Taxes)  a  domestic  corporation  which  owns  a  majority  of  the 
voting  stock  of  a  foreign  corporation  shall  be  entitled  to  credit  in 
respect  of  any  income,  war  profits  or  excess  profits  taxes  paid  (but 
not  including  taxes  accrued)  by  such  foreign  corporation  during  the 
taxable  year  to  any  foreign  country  or  to  any  possession  of  the 
United  States  upon  income  derived  from  sources  without  the  United 
States  in  an  amount  equal  to  the  proportion  which  the  amount  of  any 
dividends  (not  deductible  under  section  234  (deductions)  received  by 
such  domestic  corporation  from  such  foreign  corporation  during  the 
taxable  year  bears  to  the  total  taxable  income  of  such  foreign  cor- 
poration upon  or  with  respect  to  which  such  taxes  were  paid.  But 
in  no  such  case  shall  the  amount  of  the  credit  for  such  taxes  exceed 
the  (amount  of  such  dividends  (not  deductible  under  section  234)  received 
by  such  domestic  corporation  during  the  taxable  year.  A  domestic  cor- 
poration seeking  such  credit  must  comply  with  those  provisions  of  sub- 
division (a)  of  article  383  (Conditions  of  Allowance  of  Credit)  which 
are  applicable  to  credits  for  taxes  already  paid,  except  that  in  accord- 
ance with  article  611  (Credit  for  Foreign  Taxes)  the  form  to  be  used 
in  form  1118  instead  of  form  1116. 

Art.  636,  Reg.  45. 


(Amplification  of  "Standard  Manual  1919,"  IT  711) 

Consolidated  Net  Income  of  Affiliated  Corporations. — Subject  to 
provisions  covering  the  determination  of  taxable  net  income  of 
separate  corporations,  and  subject  further  to  the  elimination  of  inter- 
company transactions,  the  consolidated  taxable  net  income  shall  be  the 
combined  net  income  of  the  several  corporations  consolidated,  except  that 
the  net  I  income  of  corporations  coming  within  the  provisions  of  article  635 
(Corporations  Deriving  Chief  Income  from  Government  Contracts) 
shall  be  excluded.  In  respect  of  the  statement  of  gross  income  and  de- 
ductions and  the  several  schedules  required  under  form  1120,  a  cor- 
poration filing  a  consolidated  return  is  I  required  to  prepare  and  file  such 
statements  and  schedules  in  columnar  form  to  the  end  that  the  details 
of  the  items  of  gross  income  and  deductions  for  each  corporation  included 
in  the /consolidation  may  be  readily  audited. 

Art.  637,  Reg.  45. 

(New  Matter) 

Different  Fiscal  Years  of  Affiliated  Corporations. — In  the  case  of 
all  consolidated  returns,  consolidated  invested  capital  must  be 
computed  as  of  the  beginning  of  the  taxable  year  of  the  parent  or 
principal  reporting  company  and  consolidated  income  must? be  computed 
on  the  basis  of  its  fiscal  year.  Whenever  the  fiscal  year  of  one  or  more 
subsidiary  or  other  affiliated  corporations   differs   from  the  fiscal  I  year 

41 


of  the  parent  or  principal  corporation,  the  Commissioner  should  be  fully 
advised  by  the  taxpayer  in  order  that  provision  may  be  made  I  for  assess- 
ing the  tax  in  respect  of  the  period  prior  to  the  beginning  of  the  fiscal 
year  of  the  parent  or  I  principal  company. 

Art.  638,  Reg.  45. 

DEPLETION  AND  DEPRECIATION. 

Surplus  and  Undivided  Profits:  Allowance  for  Depletion  and 
Depreciation. — Depletion,  like  depreciation,  must  be  recognized  in 
all  cases  in  which  it  occurs.  Depletion  attaches  to  each  unit  of 
mineral  or  other  property  removed,  and  the  denial  of  a  deduction 
in  computing  net  income  under  the  Act  of  August  5,  1909,  or  the 
Hmitation  upon  the  amount  of  the  deduction  allowed  under  the  Act 
of  October  3,  1913,  does  not  relieve  the  corporation  of  its  obligation 
to  make  proper  provision  for  depletion  of  its  property  in  computing 
its  surplus  and  undivided  profits.  Adjustments  in  respect  of  depre- 
ciation or  depletion  in  prior  years  will  be  made  or  permitted  only 
upon  the  basis  of  affirmative  evidence  that  as  at  the  beginning  of  the 
taxable  year  the  amount  of  depreciation  or  depletion  written  off  in 
prior  years  was  insufficient  or  excessive,  as  the  case  may  be.  Where 
deductions  for  depreciation  or  depletion  have  either  on  the  books  of 
the  corporation  or  in  its  returns  of  net  income  been  included  in  the 
past  in  expense  or  other  accounts,  rather  than  specifically  as  deprecia- 
tion or  depletion,  or  where  capital  expenditures  have  been  charged 
to  expense  in  lieu  of  depreciation  or  depletion,  a  statement  indicating 
the  extent  to  which  this  practice  has  been  carried  should  accompany 
the  return. 

Art.  839,  Reg.  45. 


INVESTED  CAPITAL,   CHANGES  IN. 

Changes  in  Invested  Capital  During  Year. — The  invested  capital 
as  of  the  beginning  of  any  period  of  one  year  or  less  should  be 
adjusted  by  an  appropriate  addition  or  deduction  for  each  change 
in  invested  capital  during  the  period.  The  amount  so  added  or  de- 
ducted in  each  case  is  the  amount  of  the  change  averaged  for  the 
time  remaining  in  the  period  during  which  it  is  in  effect.  The  frac- 
tion used  in  finding  such  average  is  the  number  of  days  remaining 
in  the  period  (including  the  day  on  which  the  change  occurs)  over 
the  number  of  days  in  the  period.  Thus  if  a  return  is  made  for  the 
calendar  year  ending  December  31,  1918,  and  if  $100,000  f  additional 
capital  was  paid  in  on  February  17,  1918,  this  addition  to  invested 
capital  is  in  effect  for  318  days,  and  the  amount  to  be  added  to  the 
invested  capital  as  of  the  beginning  of  the  year  would  be  318/365 
of  $100,000,  or  $87,123,29.  If  $50,000  of  this  amount  was  withdrawn 
on  October  31,  1918,  the  amount  to  be  deducted  would  be  62/365  of 
$50,000,  or  $8,493.15. 

Art.  853,  Reg.  45. 

DIVIDENDS. 

Effect  of  Ordinary  Dividend. — ^A  dividend  other  than  a  stock  divi- 
dend affects  the  computation  of  invested  capital  from  the  date  when 
the  dividend  is  payable  and  not  from  the  date  when  it  is  declared, 
except  that  where  no  date  is  set  for  its  payment  the  date  when 
declared  will  be  considered  also  the  date  when  payable.  For 
the  purpose  of  computing  invested  capital  a  dividend  paid  after  the 
expiration  of  the  first  sixty  days  of  the  taxable  year  will  be  deemed 

42 


to  be  paid  out  of  the  net  income  of  the  taxable  year  to  the  extent  of 
the  net  income  available  for  such  purpose  on  the  date  when  it  is 
payable.  See  Article  857,  Regulations  45,  and  "Standard  Manual,  1919," 
paragraph  835,  relative  to  method  for  determining  available  net  in- 
come. The  surplus  and  undivided  profits  as  of  the  beginning  of  the 
taxable  year  will  be  reduced  as  of  the  date  when  the  dividend 
is  payable  by  the  entire  amount  of  any  dividend  paid  during  the 
first  sixty  days  of  the  taxable  year  and  by  the  amount  of  any 
other  dividend  in  excess  of  the  current  net  income  available  for 
its  payment.  From  the  date  when  the  dividend  is  payable  the  amount 
which  the  several  stockholders  are  entitled  to  receive  will  be  treated 
as  if  actually  paid  to  them,  whether  or  not  it  is  so  paid  in  fact,  and 
the  surplus  and  undivided  profits,  either  of  the  taxable  year  or  of  the 
preceding  years,  will  in  accordance  with  the  foregoing  provisions 
be  deemed  to  be  reduced  as  of  that  date  by  the  full  amount  of  the 
dividend.  Amounts  paid  to  stockholders  in  anticipation  of  dividends, 
or  amounts  withdrawn  by  stockholders  in  excess  of  dividends  de- 
clared, will  in  computing  invested  capital  have  the  same  effect  as  if 
actually  paid  as  dividends.  See  also  Article  813  (Borrowed  Capital 
or  Paid-in  Surplus),  and  see  generally  section  201  (Dividends,  "Stand- 
ard Manual,  1919,"  page  53,  line  11)  and  articles  1541-1548,  Regulations 
45,  Dividends.* 

Art.  858,  Reg.  45. 

Effect  of  Stock  Dividend. — The  payment  of  a  stock  dividend  has 
no  effect  upon  the  amount  of  invested  capital.  Such  items  as  ap- 
praised value  of  good  will,  appreciation  in  value  of  real  estate  or 
other  tangible  property,  etc.,  although  carried  to  surplus  and  dis- 
tributed as  stock  dividends,  can  not  in  this  matter  be  capitalized  and 
included  in  computing  invested  capital.  If  a  corporation  has  paid  a 
stock  dividend  in  excess  of  its  true  surplus,  it  can  not  be  deemed  to 
have  any  greater  invested  capital  than  could  have  been  computed 
had  no  such  stock  dividend  been  paid. 

Art.  859,  Reg.  45. 

CAPITAL,   IMPAIRJMENT   OF. 

Impairment  of  Capital. — Capital  or  surplus  actually  paid  in  is  not 
required  to  be  reduced  because  of  an  impairment  of  capital  in 
the  nature  of  an  operating  deficit,  except  where  there  has  been 
directly  or  indirectly  a  liquidation  or  return  of  their  investment  to 
the  stockholders,  in  which  case  full  effect  must  be  given  to  any 
liquidation  of  the  original  capital. 

Art.  860,  Reg.  45. 

CORPORATIONS  SUCCESSOR  TO  PARTNERSHIP. 

Net  Income  and  Invested  Capital  of  Predecessor  Partnership  or 
Individual. — If  the  predecessor  trade  or  business  was  carried  on  by  a 
partnership  or  individual,  the  corporation  shall  make  its  return  of  the 
net  income  and  invested  capital  of  such  trade  or  business  as  nearly  as 
may  be  in  the  same  manner  as  if  such  trade  or  business  had  been  carried 
on  by  a  corporation.  It  shall  submit  with  its  return  a  statement  setting 
forth  (a)  the  manner  in  which  such  trade  or  business  was  carried  on 
and  (b)  the  points,  if  any,  in  which  the  provisions  of  the  statute  and  of 
the  regulations  are  not  fully  applicable  to  the  determination  of  the  net 
income  or  invested  capital  of  the  predecessor  trade  or  business  for  the  pre- 
war period.  In  no  case  shall  the  deduction  from  gross  income  for  salary 
or  compensation  for  personal  services  exceed  the  salaries  or  compensation 

43 


customarily  paid  at  that  time  by  corporations  or  partnerships  of  similar 
size  and  standing  engaged  in  like  or  similar  trades  or  businesses  for 
similar  services  under  like  responsibilities. 

Art.  932,  Reg.  45. 

Election  to  be  Taxed  as  Corporation. — A  business  enterprise  (a) 
which  is  organized  as  a  corporation  before  July  1,  1919,  (b)  in  which 
capital  is  and  has  been  a  material  income -producing  factor,  and  (c)  which 
was  previously  owned  by  a  partnership  or  individual,  may  elect  to  be 
taxed  as  a  corporation  on  its  net  income  from  January  1,  1918,  to  the  date 
of  organization  of  the  corporation.  In  such  event  the  corporation  shall 
be  treated  as  if  in  existence  since  January  1,  1918,  for  the  purposes  of 
the  income  tax,  the  war  profits  and  excess  profits  tax,  and  the  capital 
stock  tax.  But  this  option  is  not  extended  to  a  business  enterprise  with 
a  net  income  for  the  taxable  year  1918  less  than  twenty  per  cent  of  its 
invested  capital. 

Art.  933,  Reg.  45. 

VALUATION  OF  ASSETS  UPON  REORGANIZATION. 

Adjustment  for  Asset  Differently  Valued  in  Prewar  Invested  Capital. 

— In  any  case  in  which  as  a  result  of  a  reorganization  or  for  any 
other  reason  any  asset  in  existence  both  during  the  taxable  year  and  any 
prewar  year  is  included  in  computing  the  invested  capital  for  the  taxable 
year,  but  is  not  included  in  computing  the  invested  capital  for  such 
prewar  year,  or  is  valued  on  a  difl'erent  basis  in  computing  the  invested 
capital  for  the  two  years,  the  difference  resulting  therefrom  shall  not  be 
included  in  determining  the  difference  10  per  cent  of  which  is  added  to  or 
deducted  from  the  war  profits  credit  under  section  311  (a)  (2)  (Credits, 
Law,"  Standard  Manual,  1919,"  page  92,  line  38).  In  any  such  case 
the  corporation  shall  make  the  readjustment  required  by  the  statute, 
and  shall  submit  with  its  return  a  full  statement  of  the  difference  in 
such  valuations  and  of  the  facts  which  give  rise  to  such  difference. 
See  also  section  331  of  the  statute  (Reorganization  After  March  3, 
1917,"  Standard  Manual,  1919,"  page  98,  line  54)  and  article  941 
(Valuation  of  Assets  After  Reorganization). 

Art.  934,  Reg.  45. 


44 


List  of  Forms 


(For  Guide  to  Forms  see  p.  47.) 

The  symbol  (*)  indicates  the  Income  and  Excess  Profits  tax  forms 
issued  by  the  Treasury  Department  for  use  during  the  years  1918  and  1919. 
The  numbers  not  bearing  the  symbol  refer  to  forms  in  use  prior  to  the 
year  1918. 

No.     Style. 

*  46     — Claim  for  Refund.     Taxes  Erroneously  or  Illegrally  Collected. 

*  47     — Claim  for  Abatement.     Taxes  Erroneous  or  Xlleg-ally  Assessed. 
'i'lOOO   — Ownership  Certificate.     Tax  to  be  Paid  at  Source. 

*1001  — Ownership  Certificate.     Tax  Not  to  be  Paid  at  Source. 

*1001-A — Ownership  Certificate.  Tax  Not  to  be  Paid  at  Source  (Dividends 
on  Stock  of  Poreigrn  Corporations  and  Interest  on  Bonds  of 
Foreisfn  Countries  and  Corporations). 

1009  — Porm  of  Oath  Required  of  a  Withholding-  Agfent  When  Actlugf 
for  Another  in  Pilingr  a  Return. 

♦1012  — Monthly  Return  of  Normal  Income  Tax  to  be  Paid  at  Source 
(Interest  on  Bonds  and  Other  Similar  Obligfations  of  Domestic 
and  Resident  Oblig-ation  of  Domestic  and  Resident  Corpora- 
tions and  Poreig-n  Corporations  Having"  a  Paying"  Ag"ent  in 
United   States). 

1012-A — (Pollow  Sheet  for  1012.) 

*1013  — Annual  Return  of  Normal  Tax  to  be  Paid  at  Source  (Same 
Explanation  as  Form  1012). 

1015      — Ownership  Certificate — Fiduciary.     The  Source. 

1019      — Ownership  Certificate— Fiduciary.     Not  the  Source. 

1030  — Insurance   Company  Return   (Including"  Mutual  Life  and  Mutual 

Marine). 

1030- A — Mutual  Insurance  Company  Return  (Other  Thau  Mutual  Life  and 
Mutual  Marine). 

1031  — Corporation   Income   Tax  Return    (For  All   Except  Railroad   and 

Insurance  Companies). 

♦1031-T — Tentative  Return  and  Estimate  of  Corporation  Income  and 
Profits  Taxes  and  Request  for  Extension  of  Time. 

*1040  Individual  Income  Tax  Return.  For  Net  Income  of  More  than 
$5,000. 

*1040-A— Individual  Income  Tax  Return.     For  Net  Incomes  of  Not  More 
Than  $5,000. 

♦1040-F — Schedule  of  Farm  Income  and  Expenses. 

*1040-T — Tentative  Return  and  Estimate  of  Individual  Income  Tax  for 
1918  and  Request  for  Txtension  of  Time. 

♦1042  — Annual  Return  of  Normal  Income  Tax  to  be  Paid  at  Source 
(Salaries,  Wag-es,  Rent,  etc.,  Paid  to  Nonresident  Alien  Indi- 
viduals and  Foreign  Corporation  [Not  Eng"ag"ed  in  Trade  or 
Business  Within  the  United  States  and  Not  Having"  Any  Office 
or  Place  of  Business  Therein]). 

45 


LIST    OF   FORMS — Continued. 

No.     Style. 
1043-A — Annnal    Iiist    Return    of    Amount    of    Normal    Tax    Withheld    on 

Foreiirn  Income  hy  Iiicensed  Bank  or  Collectingf  Ag'encles. 
1044      — ^Monthly  :List  Return  of  Amount  of  Normal  Income  Tax  Withheld 

by  Pirst  Bank  or  Collecting'  Agfency  Receiving:  Coupons  and 

Interest  Orders  Not  Accompanied  by  Certificates  of  Owners. 
1044-A — Annual  list  return   (Made  up  from  Pomr  1044). 
*1058    — Substitute   Certificate— Tax   Not  to   be  Paid   at   Source    (Interest 

on    Bonds    and    Other    Similar    Obligfations    of    Domestic    and 

Resident  Corporations). 
*1059    — Substitute   Certificate. — Tax  to   be   Paid   at   Source    (Interest   on 

Bonds   and   Other  Similar  Oblig'ations,   etc.). 

1063      — Exemption  Certificate— Pirms,  Orgranizations  and  Pidnciaries. 

1065      — Partnership  Return. 

1071  — Exemption  Certificate — Banks  or  Bankers,  Either  Poreigrxi  or 
Domestic. 

*1078    — Certificate  of  Alien  Claimingf  Residence  in  U.  S. 

1086  — Ownership   and   Exemption   Certificate— Nonresident   Alien   Plrm, 

Orgfanization,    etc. 

1087  — Ownership  Certificate — Disclosing*  Actual  Owner  of  Stock. 

1088  — Certificate  for  Claiming*  Deductions — ^Individuals. 
1090      — Railroad  Corporations  (1917). 

1095      — Excess  Profits   Tax    (1917). 

*1096    — Annual  Information  Return  of  Payments,  etc.,  of  $1,000  or  More. 

^1096-A — ^Monthly  Information  Return  Payments  of  Interest  on  Bonds  of 
Domestic  and  Poreign  Corporations  and  Countries  and  Divi- 
dends on  Stock  of  Poreig'n  Corporations. 

*1096-B — Annnal  Information  Return.  Pajonents  of  Interest,  etc.  (same  as 
1096-A). 

^1098  — Report  of  Income  Paid  to  Nonresident  Aliens,  Individuals  and 
Poreign  Corporations  During  Calendar  Year  1918. 

'i'1099  — Report  of  Income  of  $1,000  or  More  Paid  during*  the  Calendar 
Year  1918. 

1100  — Brokers  Information  Returns. 

1101  — Individual  Excess  Profits  Tax  Return  for  Calendar  Year  1917. 

1102  — Partnership  Excess  Profits  Tax  Return. 

1103  — Corporation   Excess   Profits    Tax   Return. 

1105  — Receipt  for  Income  and  Excesss  Profits  Tax  for  1917. 

*1107  — Same   as   Porm   1105   Receipt  €or   1918. 

1112  — Corporation  Undistributed  Net  Income  Tax  Return. 

♦1114  — Application  for  Permission  to  Establish  a  Replacement  Pund. 

1116  — Credit  for  Taxes. 

1117  — Bond  Pending  Determination  of  Credit  for  Taxes.  * 

1118  — Credit  for  Foreign  Taxes. 

1119  — Bond  Pending*  Determination  of  Credit  for  Poreig*u  Taxes. 
♦1120  — Corporation  Income  and  Profits  Tax  Return. 

4'1122    — Information  Return  of  Subsidiary  or  Affiliated  Corporation. 

*1123  — Statement  of  Tax  Due  (Income,  War  Profits  and  Excess  Profits 
Taxes  for  1918). 

46 


Guide  to  Forms 


Abatement  of  Assessed  Taxes  and  Penalties —  Form 

Claim    for    47 

Actual  Owner  of  Stock — 

Certificate    showing    1087 

Agrent  for   Nonresident  Alien — 
Annual  return   of 

Foreign   corporation   other  than   insurance   company — 

Annual    return    1120 

Interest  on  bonds  and  dividends  on  stock  of  domestic 
corporations: 

Tentative  return   1031-T 

Foreign  insurance  company — 

Interest    on    bonds    and    dividends    on    stock   of   domestic 

corporations    1030 

Foreign  Mutual  Insurance  Co. — 

Interest    on    bonds    and    dividends    on    stock    of    corpora- 
tions to  be  made  by  representative 1030-A 

Individual —  * 

Income  of   $5,000  or  less  1040-A 

Income   of  more   than    $5,000 1040 

Tentative    return    1040-T 

Alien  Claimingr  Residence  in  TJ.  S. — 

Certificate    of    1078 

Banks  and  Bankers — 

Substitute  certificate,  claiming  personal  exemption 1058 

Substitute  certificate,  not  claiming  personal  exemption 1059 

Banks  or  Bankers  (Foreign  or  Domestic) — 
Exemption  certificate  in  connection  with — 

Foreign  dividends  payable  in  U.   S.   to   nonresident  alien 1071 

Foreign  securities  payable  in  U.  S 1071 

Beneficiary — 

See  "Fiduciary." 

Annual  return  of  income  received  through  fiduciary — 

Income    of    more    than    $5,000 1040 

Income  of   $5,000   or   less 1040-A 

Tentative   return   1040-T 

Bond — 

Pending  determination  of  credit  for  taxes 1117 

Pending  determination   of  credit  for  foreign   taxes 1119 

Brokers'  Information   Returns   1100 

Certificates — 

See  "Ownership  Certificates"  and  "Substitute  Certificates  of  Own- 
ership." 
See   "Exemption   Certificates." 
See  "Alien  Claiming  Residence  in  U.  S." 
See  "Ownership  and  Exemption  Certificate." 
Deductions,   certificates  for  claiming 1088 

Claims — 

Abatement  of  assessed  taxes  and  penalties 47 

Refund   of   paid   taxes   and    penalties 46 

CoUectingf       Agfent — 

See   "Withholding  Agents." 
Corporations — 

Affiliated  Corporations — 

Information   return 1122 

Affiliated  or  Subsidiary — 

Information    return    of    1122 

47 


GUIDE    TO    FORMS— Continued. 

Corporations — Continued. 

Annual    returns    of —  Form 

Domestic  corporations  other  than   Insurance   companies 1120 

Tentative     return : 1031-T 

Domestic  corporations  other  than  railroad  and  insurance  com- 
panies   (Income — Year    1917)    1031 

Excess    Profits    Tax — 1917    1103 

Income    and    Profits    taxes — 1918 1120 

Insurance  companies,   including  mutual   life  and  mutual  ma- 
rine      1030 

Mutual    insurance    companies,    other    than     mutual    life    and 

mutual    marine    1030-A 

Railroad    corporations    1090 

Undistributed    net    income _ 1112 

Claims  for  exemption  from  withholding  at  source  or  income — • 

Bonds,    mortgages,    etc.,    see 1001 

Replacement  Fund,  application   for  permission   to   establish 1114 

Tax   due — statement   of — 

Income   and   Profits   Tax — 1918 1123 

Credit  for  Taxes  1116 

Credit    for   Poreigfn    Taxes 1118 

Deductions — Individuals — Certificate   for   claixung' 1088 

Excess  Profits  Tax —  ^^^ 

Returns    for    1917 1095 

Corporations     1103 

Individuals 1101 

Partnerships    1102 

Execntor — 

Annual  return — 

Estate    during    period    of    administration — 

Income   of  more  than    $5,000 1040 

Income    of    $5,000    or    less 1040-A 

Tentative   return   1040-T 

For  and   in   behalf  of  deceased   person — 

Income  of  more   than    $5,000 1040 

Income    cf    $5,000    or    less 1040-A 

Tentative    return    1040-T 

For  and  in  behalf  of  estate  when  distributed 1041 

Excess  Tax  'Withheld — 

Claim    for    refund 46 

Exemption.  Certificate- 
Firms,  organizations,   and   fiduciaries 1063 

Farmers — 

Income  and  expense  return 1040-F 

Fiduciary — 

List   return    of   tax   withheld    on    income    paid,    and    undistributed 

income   payable   to  beneficiaries  1041 

Ownership    certificates — 

Paid    at    source 1015 

Not  paid  at   source 1019 

Foreign  Corporations — 
Annual   Returns   of — 

Foreign  Insurance  Co. — 

The  actual  owner  of  stock  of  which  citizen  or  resident  is 

actual  owner   1030 

Interest    on    bonds    and    dividends    on    stock    of    domestic 

corporations  to  be  made  by  representative 1030 

Foreign   Mutual   Insurance   Co. — 

Actual  owner  of  stock  of  which  citizen  or  resident  is  the 

actual    owner    1030 

Interest    on    bonds    and    dividends    on    stock    of    domestic 

corporations    to    be    made    by    representative 1030 

Foreign  Corporations,   other  than   Insurance  Companies — 

Actual  owner  of  stock  of  domestic  corporation   of  which 

a  citizen  or  resident  is  actual  owner 1120 

Tentative     return )     1031-T 

Interest    on    bonds    and    dividends    on    stock    of    domestic 

corporations,  to  be  made  by  representative 1120 

Tentative   return    1031-T 

Foreign  Partnership — 

Ownership   certificate. 
Bonds — 

To  be  furnished  with  coupons  detached  from  bonds  of  domes- 
tic corporations — 

Claiming   exemption    1001 

Not    claiming    exemption 1000 

48 


GUIDE    TO    FORMS— Continued. 

G-uardian —  Form 

Annual  return  in  behalf  of — 
Minor — 

Income  of   more   than   $5,000 1040 

Income    of    $5,000    or    less 1040-A 

Tentative   return    1040-T 

Incoiue  and  Profits  Tax  Return — 
Annual    returns    of — 

Income  of  more  than    $5,000 _ 1040 

Income  of   $5,000  or  less 1040-A 

Tentative    return    _ 1040-T 

Schedule    of   farm    income    and    expense 1040-F 

Corporations     1120 

Excess   Profits   Tax — 

Annual   return  year   1917    1101 

Ownership  certificate — 

Bonds,   mortgages,   etc. — 

Claiming    exemption    1001 

Not  claiming  exemption 1000 

Individual — 

Annual    return    of — 

Income  of  more  than  $5,000. 1040 

Income   of   $5,000   or   less 1040-A 

Tentative   return    1040-T 

Information  Returns — 

Brokers 1100 

Payments  of  $1,000  or  more — 

Annual  letter  of  transmittal 1096 

Detail    payments    1099 

Payments  of  interest  on  bonds  and  dividends  on  stock  of  foreign 
corporations — 

Monthly   return    1096-A 

Annual    return    1096-B 

Payments  to  nonresident  alien  individuals  and  foreign  corpora- 
tions in  calendar  year  1918 1098 

Joint  Owners  of^Bonds — 

Ownership   certificate   bonds,    etc. — 

Claiming   exemption   1001 

Not   claiming   exemption 1000 

Joint  Iiessors  of  Property — 
Ownership  certificate — 

Claiming    exemption     1001 

Not   claiming   exemption 1000 

Non-Resident  Aliens — 

See   "Ownership  and  Exemption   Certificate," 
Annual    (Individual)    Returns — 

(To  be  used  by  agent  or  representative) — 

Income  of  more   than    $5,000..* 1040 

Income  of   $5,000   or   less 1040-A 

Tentative    return    1040-T 

Ownership  certificate — 

Foreign    bonds,    to    accompany    interest    coupons,    payable    in 

U.     S 1071 

Oath — 

Required  of  withholding  agent  when  making  return  for  another..l009 
Ownership  Certificates — 
Fiduciaries — 

To   be   paid   at   source 1015 

Not   to   be   paid   at   source 1019 

Showing    actual    owner   of    stock 1087 

Tax  to  be  paid  at  source 1000 

Tax   not   to   be   paid   at   source 1001 

Tax  not  to  be  paid  at  source  (dividends  on  stock  of  foreign  cor- 
porations and  interest  on  bonds  of  foreign  countries  and  cor- 
porations)  1001-A 

Ownership  and  Exemption  Certificate — 

Nonresident    alien    firm,    organization,     etc 1086 

Partnerships — 

Claims  of  exemption   from  withholding  at  source    (bond  interest)  1001 
(Bond  interest.) 

Partnership    Return 1065 

Excess  profits  tax  return  1917 1102 

49 


GUIDE   TO   FORMS— Continued. 

Railroad  Corporations —  Form 

Returns    of — for    1917    1090 

Receipt  for  Incoxue  and  Excess  Profits  Taxes — 

Year    1917    1105 

Year    1918    1107 

Record  Owner  of  Stock — 
Citizen   or   resident — 

Annual  return  for  and  in   behalf  of  non-resident  actual  owner — 

Income    of    more    than    $5,000 1040 

Income   of   $5,000   or  less 1040-A 

Tentative   return   1040-T 

Refund  of  Paid  Taxes  and  Penalties — 

Claim    for 46 

Replacement  Fund — 

Application    for    permission    to    establish 1114 

Representative  of   Non-Resident  Allen — 

See  "Agent  of  Foreign  Insurance  Co." 
Subsidiary  Corporations — 

Information    returns    1122 

Substitute  Certificates  of  Ownership — 

For  use  of  responsible  banks  or  bankers — 

Tax  not  to  be  paid  at  source 1058 

Tax  to  be  paid  at  source 1059 

Tax  Sue- 
Statement  of — 

Income,    war   profits    and    excess    profits — ^year   1918 1123 

Trustees  Under  Mortgrage — 

Claim   for   exemption    from   withholding   at   source   of — 

Income,   bonds,   etc : 1001 

Undistributed   Net  Income— 

Corporations 1113 

Widow — 

Annual   return   at   end    of   year   in   which   husband    died — 

Income  of  more  than  $5,000 : 1040 

Income  of  $5,000  or  less :..... .•. 1040-A 

Tentative    return 1040-T 

Withliolding-  Agents — 

List    returns    of    tax    withheld — 
Domestic    Bonds — 

Monthly    return 1012 

Follow    sheet    for    monthly    return ..— : 1012-A 

Annual    return 1013 

Miscellaneous  Income — 

Annual    return 1042 

Annual   return    (foreign    income) ^ 1043-A 

Oath  required   of  withholding  agent  when  acting  for  another   in 

filing    return    1009 

Return  of  tax  withheld  by  first  bank  or  collecting  agent  when  cou- 
pons or  orders  are  not  accompanied  by  certificate  of  owner- 
ship— 

Monthly 1044 

Annual     1044-A 


50 


Stock  Dividends 
Paid  in  1918 


Provision  is  made  in  the  Revenue  Act  of  1918  that 
stock  dividends  received  by  a  taxpayer  between  Jan- 
uary 1  and  November  1,  1918,  both  dates  inclusive, 
or  which  during  such  period  are  authorized  and 
declared,  and  entered  on  the  books  of  the  corpora- 
tion, and  are  received  by  a  taxpayer' after  November 
1,  1918,  and  before  the  expiration  of  thirty  days 
after  the  passage  of  this  act,  shall  be  taxed  to  the 
recipient  at  the  rates  prescribed  by  law  for  the  years 
in  which  the  corporation  accumulated  the  earnings 
or  profits  from  which  such  dividend  was  paid,  but 
the  dividend  shall  be  deemed  to  have  been  paid 
from  the  most  recently  accumulated  earnings  or 
profits. 

On  the  following  page  is  a  partial  list  of  stock  divi- 
dends  paid  during  the  year  1918 : 


51 


Class 
of 
Name  Stock 


Date 
Paid 

; 

Amount 
Paid  in 
Stock 

% 

Per  Cent  of 

Surplus  or  Profits 

Distributed  from  Years 

1918         1917          1916 

%             %                % 

Feb. 

1 

21/2 

—  _ 

41.6 

58.4 

May 

1 

21/^ 

100 





Aug. 

1. 

2y2 

74.8 



25.2 

Nov. 

1 

2y2 

32.4 



67.6 

Dec. 

7 

15 

100 





Feb. 

15 

2 

100 



_  — 

May 

15 

2 

100 





Jan. 

2 

V2 



100 



Feb. 

1 

% 

100 





Mar. 

1 

% 

100 





April 

1 

% 

100 





May 

1 

% 

100 





June 

1 

% 

100 





July 

1 

% 

100 





Aug. 

1 

% 

100 





Sept. 

1 

% 

100 





Oct. 

1 

% 

100 





Nov. 

1 

% 

100 





^Dec. 

1 

% 

100 





June 

15 

6 

100 





Feb. 

1 

5 

33.23 

66.77 



Jan. 

15 

2 



100 



July 

15 

2 

100 





June 

3 

25 

35.4 

62.4 

2.2 

'Dec. 

2 

15 

100 



April 

10 

20 

39.901 

60.099 



April 

1 

1 

100 





Mar. 

7 

4 

100 





Aug. 

15 

4 

100 





Feb. 

15 

2 

100 





May 

15 

2 

100 





Oct. 

1 

20 

100 





Mar. 

3 

25 



100 



Amer.  Light  &  Traction Com. 

Amer.  Light  &  Traction Com. 

Amer.  Light  &  Traction Com. 

Amer.  Light  &  Traction Com. 

Amer.  Sumatra  Tobacco Com. 

By-Products  Coke  Corp Com. 

By-Products  Coke  Corp Com. 

Cities  Service Com. 

Cities  Service Com. 

Cities   Service Com. 

Cities  Service Com. 

Cities  Service Com. 

Cities   Service -t Com. 

Cities  Service Com. 

Cities   Service Com. 

Cities   Service Com. 

Cities   Service Com. 

Cities  Service Com. 

Cities  Service Com. 

Crown  Oil  Com. 

General    Chemical    Com. 

General  Electric  Com. 

General  Electric   Com. 

Gulf  States  Steel -__-  Com. 

Keystone   Tire   &   Rubber Com. 

Lorillard  (P.)   Co _ Com. 

Middle  West  Utilities Com. 

Porto  Rican  Amer.  Tob Com. 

Procter  &   Gamble Com. 

Semet-Solvay    Co Com. 

Semet-Solvay    Co Com. 

Weyman-Bruton  Co ^ Com. 

VMieeling   Steel   &   Iron Com. 

*Declared  prior  to  November  1,  1918. 


52 


Corrections 

IN    THE    STANDARD    MANUAL 
OF  THE  INCOME  TAX  FOR  1919 

On  account  of  the  delay  in  the  passage  of  the  new  Revenue 
Act  and  the  Hmited  time  allowed  by  the  Treasury  Depart- 
ment in  which  to  file  returns,  the  compilation  of  the  Standard 
Manual  of  the  Income  Tax  for  1919  was  made  at  as  early  a 
date  as  possible  in  response  to  a  pressing  demand  by  the  pub- 
lic for  authentic  advance  information  in  connection  with  the 
new  legislation  . 

During  the  construction  of  the  Standard  Manual  of  the 
Income  Tax  for  1919  we  were  constantly  in  touch  with  the 
officials  of  the  Treasury  Department  in  order  to  assist  both 
the  Government  and  the  public  in  the  administration  of  the 
law  through  the  medium  of  our  several  publications  in  a 
practical  manner,  endeavoring  to  simplify  its  interpretation 
so  as  to  be  easily  understandible  to  the  ordinary  taxpayer. 

In  the  absence  of  any  new  regulations  and  in  consequence 
of  our  efforts  to  place  this  data  in  the  hands  of  the  taxpaying 
public  at  the  earliest  possible  moment,  several  rulings  were 
subsequently  made  which  completely  reversed  the  former 
procedure  and  which  necessitates  our  calling  attention  to 
several  corrections  to  be  noted  in  the  Standard  Manual,  as 
follows : 

[1] 

HUSBAND  AND  WIFE 

In  the  case  of  a  husband  and  wife  making  separate  returns,  each 
claiming  one-half  the  marital  exemption,  the  amount  of  tax  shown  on 
page  15  is  to  be  $360  instead  of  $480.  The  reason  for  this  change  is 
that  previously  the  normal  tax  has  always  been  computed  on  the  joint 
income  of  husband  and  wife,  while  under  the  new  regulation  recently 

53 


issued,  the  Department  holds  that  the  normal  tax  as  well  as  the  sur- 
tax shall  be  computed  on  the  separate  incomes  of  each  and  the  tax  shall 
be  levied  according  to  the  manner  in  which  they  divide  the  exemption  of 
$2,000.  This  is  a  decided  advantage  to  the  taxpayer,  as  may  be  seen  by 
the  example,  as  the  normal  tax  rates  are  6%  on  the  first  $4,000  over 
the  exemption  of  $2,000,  and  12%  on  an  amount  over  the  first  $4,000 ; 
thus  in  this  case  if  the  tax  was  computed  on  the  combined  net  income 
of  husband  and  wife  instead  of  on  the  separate  incomes,  the  tax  would 
be  6%  on  $4,000  and  $12%  on  $2,000,  making  a  total  of  $480  instead  of 


Husband    $5,000 

Half   exemption 1,000 


Wife    $3,000 

Half   exemption 1,000 

Amt.   Taxable $2,000 

Rate  of  Tax 6% 


$120 


Amt.   Taxable $4,000 

Rate  of  Tax 6% 


$240 


Husband's  Tax $240.00 

Wife's    Tax 120.00 


Total    Tax. 


$360.00 


[2] 

In  the  case  of  husband  and  wife,  as  outlined  in  paragraph  236  on  page 
253,  the  statement  that  a  return  must  be  made  in  the  case  of  either 
having  a  net  income  equal  to  or  in  excess  of  $1,000  is  in  error,  as  a 
return  is  not  required  in  the  case  of  husband  and  wife  living  together 
unless  the  combined  net  income  equals  or  exceeds  $2,000. 

[3] 

LIFE  INSURANCE  POLICIES 

Up  to  the  time  of  going  to  press,  the  Department  had  ruled  that  the 
proceeds  of  life  insurance  policies  payable  to  the  estate  of  a  decedent 
when  received  by  an  executor  or  administrator  were  taxable  to  the 
amount  by  which  such  proceeds  exceeded  the  premiums  paid  by  the 
decedent  as  outlined  in  paragraph  392,  page  300,  of  the  Standard  Manual. 
This  ruling  was  reversed  by  Article  72  of  the  new  Regulations  No.  45, 
which  specifies  that  upon  the  death  of  the  insured  the  proceeds  of  his 
life  insurance  policies,  whether  paid  to  his  estate  or  to  individual  bene- 
ficiaries (but  not  if  paid  to  a  corporation  or  partnership)  are  to  be 
excluded  from  the  gross  income  of  the  beneficiary. 


[4] 


AVERAGING  INVESTED  CAPITAL 


In  the  matter  of  invested  capital,  the  illustration  of  making  average 
adjustments  where  changes  in  invested  capital  occurred  during  the  tax- 
able year  as  shown  in  paragraph  914,  on  page  482,  outlines  the  adjust- 


54 


ments  on  a  monthly  basis.  This  method  of  averaging  invested  capital 
has  been  reversed  by  Articles  853  and  854  of  Regulations  No.  45,  which 
provide  that  instead  of  the  capital  being  averaged  monthly,  the  adjust- 
ments shall  be  computed  according  to  the  exact  number  of  days  dur- 
ing the  period  which  the  change  in  capital  affected.  As  an  illustration, 
if  a  return  was  made  for  the  calendar  year  ending  December  31st,  1918, 
and  if  $100,000  of  additional  capital  was  paid  in  on  February  7th,  1918, 
this  addition  to  invested  capital  was  in  effect  for  318  days  and  the 
amount  to  be  added  to  the  invested  capital  as  of  the  beginning  of  the 
year  would  be  318/365  of  $100,000,  or  $87,123.29.  If  $50,000  of  this 
amount  was  withdrawn  on  October  31st,  1918,  the  amount  to  be  de- 
ducted would  be  62/365  of  $50,000,  or  $8,493.15. 


[5] 

CHICAGO,  MILWAUKEE  AND  ST.  PAUL  STOCK 

On  page  1019  of  the  Manual  in  the  section  dealing  with  the  price  of 
securities  on  March  1st,  1913,  the  security  listed  on  line  12  and  line  13 
as  Central  Mexico  &  Southern  Pacific,  Common  and  Preferred,  should 
be  corrected  to  read  "Chicago,  Milwaukee  &  St.  Paul,  Common  and 
Preferred." 


55 


A    Special    Day-to-Day  Tax    Service 

That  Will  Keep  You  Posted 

Throughout    the  Year 

and  a 

Special  Offer 


New  Rulings  May  Beduee 
Or  Increaselfimr  Ikx 


I  AST  year,  the  Treasury  Department  issued  more  than  100  separate  Rul- 
'  ings  and  Regulations — an  average  of  nearly  two  every  week — having  to 
do  with  various  phases  of  the  tax  payable  during  1918  and  figured  against  1917 
Income  or  Profits.  In  addition,  hundreds  of  cases  were  taken  into  £ourt  for  deci- 
sion, either  by  the  Government  or  by  various  corporations,  banks  or  individuals 
affected. 


The  new  Revenue  Bill  under  which  you 
must  figure  the  tax  to  be  paid  this  year 
against  last  year's  Income  or  Profits,  is 
likely  to  occasion  an  even  greater  number 
of  special  rulings  or  interpretations  and 
court  decisions  than  the  old  law  did.  Un- 
less you  have  a  simple,  convenient  and 
trouble-saving  way  of  keeping  posted  on  all 
these  new  rulings  or  decisions  as  they  are 
rendered,  you  are  likely  to  overlook  points 
of  vital  importance — points  that  may  mate- 
rially reduce  or  increase  your  tax. 

The  Standard  Loose  Leaf  Income  Tax 
Service — which  is  a  day-to-day  service  is- 
sued in  handy  loose  leaf  form    (entirely 


separate  and  distinct  from  the  Standard 
Manual  of  the  Income  Tax),  and  which 
covers  a  period  of  one  year — provides  a 
simple  and  sure  way  of  keeping  constantly 
up  to  date  throughout  the  year  on  all  the 
various  points  subject  to  change  or  revised 
interpretations  through  new  rulings  of  the 
Treasury  Department  or  through  Court  De- 
cisions. It  automatically  informs  you  im- 
mediately of  all  new  developments  in  any 
way  affecting  any  of  the  Federal  Taxes. 
And  such  information  on  a  single  point — 
although  hundreds  will  be  included — may 
easily  be  worth  more  to  you  than  the  total 
cost  of  the  entire  year's  service. 


The  Three  Men  In  Char^ 

.^jnJ  fie  Specialz^dvice  Privilege 


The  Standard  Loose  Leaf  Income  Tax 
Service  is  under  the  personal  direction  of 
Mr.  Edward  J.  Fath.. 

Included  as  a  part  of  this  Service — and 
additional  to  the  regular  day  to  day  bulle- 
tins— each  subscriber  receives  three  Special- 
Advice  Coupons,  each  coupon  entitling  the 
subscriber  to  submit  any  special  or  peculiar 
accounting  problem  or  question  to  Mr.  Fath 
for  his  opinion  and  advice. 

Mr.  Fath  is  the  expert  formerly  in  charge 
of  the  administration  of  the  Income  Taxes 
for  the  United  States  Government  in  the 
Second  New  York  District,  which  includes 


the  Wall  Street  Zone.  Because  of  this  ex- 
perience and  his  minute  familiarity  with 
every  phase  of  the  law  and  its  interpreta- 
tion and  practical  application,  Mr.  Fath's 
advice  on  any  point  can  be  considered  as 
authoritative. 

Associated  with  Mr.  Fath  in  the  manage- 
ment of  this  Tax  Department  are  Mr.  Frank 
A.  Roche,  who  was  Mr.  Fath's  successor  as 
Deputy  Collector  of  Internal  Revenue  for 
the  Second  District  of  New  York  (Wall 
Street  Zone),  and  Mr.  S.  L,  Heacock,  form- 
erly acting  head  of  the  Capital  Stock  Divi- 
sion of  the  Bureau  of  Internal  Revenue  in 
Washington. 


Tour  Services  In  One 


The  Standard  Loose  Leaf  Income  Tax 
Service — issued"  for  use  in  connection  with 
the  Standard  Manual  of  the  Income  Tax, 
although  entirely  distinct  from  the  Manual 
— includes  four  separate  tax  services  in 
one: 

(a)  The  full  Text,  together  with  Analy- 
sis and  Explanation  of  all  new  Treasury 
Rulings,  Regulations  or  Interpretations 
affecting  the  Income  Tax. 

(b)  The  full  Text,  together  with  Analy- 
sis   and    Explanation    of   all      

new  Treasury  Rulings,  Regu- 
lations or  Interpretations  af- 
fecting the  War  Excess  Profits 
Tax. 


(c)  The  tuU  Text,  together 
with  Analysis  and  Explana- 
tion of  all  new  Treasury  Rul- 
ings, Regulations  or  Interpre- 
tations affecting  the  Inheri- 
tance Tax. 


(d)   (This  feature  is  most 
important   and   helpful.)      A 

cumulative  supplement,  fre- 
quently revised,  to  be  inserted  within  the 
pocket  on  the  front  cover  of  your  "Standard 
Manual  of  the  Income  Tax,"  containing  a 
brief  but  adequate  digest  of  all  treasury 
decisions,  rulings  and  other  tax  data  in  the 
loose-leaf  sheets  (a),  (b)  and  (c). 

This  places  practically  under  one  cover 
(the  Manual  plus  the  Supplement)  all  tax 
information,  revised  to  date.  This  Supple- 
ment will  enable  you  at  any  time  to  see  and 
absorb  at  a  glance  the  gist  of  every  tax 
decision  and  ruHng  handed  down  from  the 
publication  of  the  "Manual"  to  the  end  of 
the  tax  year. 


Careful  and  complets 
Indexing  of  all  Bulletins 
as  issued — together  with 
cross-reference  where 
necessary  to  any  point 
or  provision  more  fully 
covered  in  the  pages  of 
the  Standard  Manual  it- 
self— makes  the  cumula- 
tive informatibn  sup- 
plied through  this  Loose 
Leaf  Service  always  quick 
and  easy  to  locate. 


Each  service  is  complete  in  itself — 
that  is,  each  tax  is  treated  separately — 
and  is  supplied  in  handy  Loose  Leaf  Bulle- 
tin form,  with  a  permanent  Loose  Leaf 
Leather  Ring  Binder  for  holding  the  Bulle- 
tins. 

To  provide  for  instant  identification  of  the 
particular  tax  treated  in  each  Bulletin  as 
issued,  the  Bulletins  are  printed  on  different 
colors  of  bond  paper — one  color  for  the 
Bulletins  on  the  Incom6  Tax,  another  color 
for  the  War  Profits  Tax,  a 
third  for  the  Inheritahce  Tax, 
and  a  fourth  .color  for  the 
Digest  of  Decisions.  The  Ring 
Binder  is  also  arranged  to 
provide  for  quick  and  easy  fil- 
ing of  the  Bulletins  in  their 
proper  order,  grouping  and 
indexfng,  thus  forming  a  con- 
venient and  permanent  refer- 
ence. 

The  scope  of  this  Loose 
Leaf  Service  is  broad.  It  in- 
cludes far  more  than  merely  a 
reprint  and  orderly  arrange- 
ment and  indexing  of  Treas- 
ury Rulings  and  Court  Decisions.  It  sup- 
plies additional  information  and  side  lights 
on  the  practical  application  of  all  auch 
rulings.  When  necessary,  each  new  ruling 
or  decision  will  be  preceded  by  a  common- 
sense  digest.  Also,  when  necessary,  there 
will  be  an  illustration  of  each  ruling  show- 
ing how  it  applies.  Thus,  this  Service  will 
not  only  instantly  show  you  whether  you 
or  your  business  will  be  affected  by  any  new 
development,  but  also,  just  how  you  will  be 
affected. 


Our  Exeeptional  Facilities 
For  KeepuigKbu  Informed 


Through  this  Loose  Leaf  Service^  the 
Standard  Statistics  Company  gives-  its 
subscribers  the  immediate  benefit  of  its 
exceptional  facilities  and  of  its  accounting 
experience. 

With  a  special  information-gathering 
Bureau  of  our  own  in  Washington,  in  con- 


stant touch  by  our  own  private  wire  with 
our  New  York  oflSce,  and  with  our  own  day- 
and-night  printing  plant,  we  are  able  to  offer 
a  fast  and  accurate  Income  Tax  Service 
which  will  keep  you  posted  up.  to  within 
twenty-four  hours. 


This  Leather  Binder  is  arranged 
in  four  divisions,  thus  providing 
for  keeping  the  Loose  Leaf  Bulle- 
tins in  their  proper  order  as  fast 
as  supplied,  and  also  making  them 
always  available  for  reference. 


Special  Short  Time  Offer 
Saves  Ifbu^S 

The  regular  charge  for  the  Standard  Loose  Leaf  Tax  Service — four  services  in  one — is 
$30  a  year.  However,  subscribers  to  the  Standard  Manual  of  the  Income  Tax  can  secure  this 
day-by-day  Loose  Leaf  Service  at  a  net  cost  of  only  $25,  by  taking  advantage  of  our  offer  to 
apply  the  full  price  paid  for  the  Manual  as  a  credit  on  the  Loose  Leaf  Service. 

For  your  convenience  in  arranging  for  the  Loose  Leaf  Service,  you  will  find  enclosed  a 
special  Order  Card  which  you  can  use  as  the  equivalent  of  a  $5  bill — we  will  accept  this 
card  as  a  $5  payment  or  credit  to  apply  on  the  Loose  Leaf  Service,  providing  the  card  is 
used  within  15  days  from  the  time  you  receive  it. 

To  head  off  any  chance  of  forgetting,  wq  suggest  that  you  sign  and  return  this  card 
at  once.  It  will  not  be  necessary  to  send  a  check — simply  mail  the  card;  we  will  then 
enter  your  order  and  start  the  service  immediately,  and  send  you  a  bill  for  $25  ($30  less 
the  $5  credit)  which  can  be  paid  later  a:t  your  convenience. 


Standard  Statistics  Company  Inc., 

47-  49  West  Street  New  York 


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